IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 01-31322
__________________________
JAVAID HUSSAIN, Etc; ET AL
Plaintiffs,
STEVEN J. RANDO and GLENN A. WOODS,
Appellants,
versus
BOSTON OLD COLONY INSURANCE COMPANY; ET AL
Defendants,
UNITED STATES OF AMERICA,
Defendant-Appellee,
HIBERNIA NATIONAL BANK,
Appellee.
___________________________________________________
Appeal from the United States District Court
For the Eastern District of Louisiana
___________________________________________________
October 31, 2002
Before WIENER, EMILIO M. GARZA,* and PARKER, Circuit Judges.
WIENER, Circuit Judge:
*
Judge Garza concurs in judgment only.
This case arrives at our doorstep after a procedural odyssey
through both the state and federal court systems. It began as a
suit in a Louisiana state court by an insured and his secured
lender to recover policy proceeds from the insurance company, and
has ended with a protracted multi-party dispute among the insured
(“Hussain”), his attorneys (collectively “Rando”), the
lender/mortgagee (“Hibernia”), the defendant insurance company
(Boston Old Colony or “BOC”) and the defendant-appellee United
States of America (the “government”) over the proper distribution
of an insurance proceeds fund that is insufficient to satisfy all
claims in full. Central to this appeal is Rando’s challenge to
federal subject matter jurisdiction, as well as the rulings of
the district court on the priority and amounts of distribution of
the insurance fund among the several claimants. We affirm the
district court in all respects except for its assessment of costs
for Hussain’s expert fees.
I. Facts and Proceedings
This case was sparked by a 1991 fire that destroyed the
inventory of Sheik’s Oriental Rugs, Inc., owned by Hussain. He
was insured up to $500,000 by BOC. Hibernia was named on the BOC
insurance policy (the “Policy”) as a loss payee, under a 1989
loan of $177,699.02 to Hussain who had secured his promissory
note by a chattel mortgage on his inventory (the “covered
2
property”). Although the Policy appears to contain two different
provisions governing the relationship between Hussain and
Hibernia, a close reading suggests that only one —— the “Loss
Payable” provision —— applies: The other, by its terms,
envisions Hibernia as the putative buyer of the covered property,
which it does not appear ever to have been. The Policy’s “Loss
Payable” provision reads as follows:
A. Loss Payable
For covered property in which both you and a Loss
Payee...have an insurable interest, we will:
...
2. Pay any claim for loss or damage jointly to you
and the Loss Payee, as interests may appear.
In signing the Hibernia loan documents, Hussain warranted that he
alone owned the mortgaged property, “free and clear from any
adverse claim, mortgage, lien, security interest, privilege, or
encumbrance.”
After the fire, Hussain defaulted on the Hibernia promissory
note and litigation commenced. In 1992, as holder of the secured
note, Hibernia sued Hussain, and in 1994 obtained a state court
default judgment against him which recognized Hibernia’s
continuing security interest in the covered property. Also in
1992, Hibernia, as loss payee under the Policy, filed a separate
state court action against Hussain and BOC to recover a portion
of the policy proceeds.
3
In 1993, Hussain sued BOC on the Policy in state court.
This suit was consolidated with Hibernia’s suit as loss payee.
In 1995, Hussain retained Rando as new counsel, and in doing so,
executed a contingency-fee agreement that assigned one-third of
any recovery to his new attorneys. Rando asserted before the
district court that he has since spent $368,449.72 in prosecuting
this case.1
BOC denied liability under the Policy’s arson exclusion.
The state court rejected that defense in a directed verdict,
ruling that BOC owed Hussain and Hibernia $500,000 in policy
proceeds, plus interest, costs, and fees. BOC appealed to the
higher Louisiana courts; but once the Louisiana Supreme Court
denied certiorari on November 13, 2000, the judgment as to BOC’s
liability became final.
On December 8, 2000, the Internal Revenue Service of the
Department of the Treasury (“IRS”) notified BOC of federal tax
liens against Hussain’s property. On the same day, Hussain
executed a new fee agreement giving Rando a 39% interest “in and
to any gross recovery I/we may have in this matter.” Rather than
institute concursus (interpleader) proceedings, BOC —— still in
the context of the consolidated suits against it, and despite the
finality of the judgment in that case —— filed a motion to have
1
Hussain v. Boston Old Colony Ins. Co., 170 F. Supp 2d. 663,
667 (E.D. La. 2001).
4
the court determine the amounts and priority of distribution of
funds. As part of that motion, BOC also secured and served on
the IRS an order to show cause why it should not be excluded from
any distribution. This prompted the IRS first to file a notice
of its tax lien in the records of Orleans Parish on January 9,
2001, and then, on January 17, 2001 to remove the case to the
Eastern District of Louisiana.2
After briefing, the district court ruled that (1) Hibernia
takes first priority, as loss payee; (2) second in line, Rando
takes as attorneys’ fees pursuant to the state court litigation,
one-third of the amount remaining after Hibernia’s claim is fully
paid; and (3) third in line, the government takes the remainder
of the policy proceeds, ahead of all other creditors of Hussain.3
Also, on motion by Hussain, the court taxed costs of $5,000,
2
See 28 U.S.C. § 1444 (2000). In this case the point at which
the IRS filed its lien does not affect the priority of claims
adjudicated here. The law provides that a federal tax lien arises
upon assessment of the tax, and thus does not impose any filing
requirement. See United States v. McDermott, 507 U.S. 447, 448
(1993). Nonetheless, provisions of the Internal Revenue Code
provide that both the holders of security interests, such as
Hibernia, and attorneys who obtain judgments or settlements for
their clients, such as Rando, have priority over the federal tax
lien. See 26 U.S.C. §§ 6323(a), (b)(8) (2000). While holders of
security interests may only have priority if such interests arise
before notice of the federal tax lien is filed, Hibernia became
loss payee in 1990 and the fire triggering its rights occurred in
1991, well before the federal government filed notice of any tax
lien.
3
Hussain, 170 F. Supp 2d. at 671-73.
5
which was one-fifth of the amount that Hussain had sought, in
payment for his expert witness, John Theriot, CPA.4
On appeal Rando has raised several issues, in essence
contending that he should be paid an additional $196,377.48, an
amount determined by applying his claimed contingent fee
percentage (39%) to the entire amount payable from the Policy and
awarded by the court.
II. Analysis
A. Standard of Review
This court reviews de novo a district court’s determination
of its subject-matter jurisdiction.5 On the merits, statutory
construction is reviewed de novo,6 with factual findings reviewed
for clear error.7 An award of attorney’s fees is reviewed for
abuse of discretion.8
4
Id. at 675.
5
Your Insurance Needs Agency Inc. v. United States, 274 F.3d
1001, 1003 (5th Cir. 2001) (“[W]e exercise plenary, de novo review
of a district court’s assumption of subject matter jurisdiction.”).
6
Kemp v. G.D. Searl & Co., 103 F.3d 405, 407 (5th Cir. 1997)
(“Questions of statutory interpretation are questions of law and
thus reviewed de novo”).
7
Jason D.W. v. Houston Indep. Sch. Dist., 158 F.3d 205, 208
(5th Cir. 1998).
8
Id.
6
B. Subject-Matter Jurisdiction
Section 2410(a) waives the sovereign immunity of the federal
government, enabling private parties to hale the government into
court to determine the priority of outstanding liens on real or
personal property.9 As a trade off for the waiver of sovereign
immunity, section 1444 permits the government to remove to
federal district court any such case initiated in state court.10
In light of this conditional relationship between §§ 2410(a) and
1444, we have held that § 1444 “confers a substantive right to
remove, independent of any other jurisdictional limitations.”11
9
28 U.S.C. § 2410(a) (2000). Section 2410(a) provides,
(a) Under conditions prescribed in this section and section 1444
of this title for the protection of the United States, the United
States may be named a party in any civil action or suit in any
district court, or in any State court having jurisdiction of the
subject matter -
(1) to quiet title to,
(2) to foreclose a mortgage or other lien upon,
(3) to partition,
(4) to condemn, or
(5) of interpleader or in the nature of interpleader with
respect to,
real or personal property on which the United States has or
claims a mortgage or other lien. Id.
10
28 U.S.C. § 1444. Section 1444 provides, “[a]ny action
brought under section 2410 of this title against the United
States in any State court may be removed by the United States to
the district court of the United States for the district and
division in which the action is pending.” Id.
11
City of Miami Beach v. Smith, 551 F.2d 1370, 1374 n.5 (5th
Cir. 1977).
7
Thus, to find subject matter jurisdiction in this case we
had to resolve initially whether § 2410(a) applies in this case.
For us to conclude that jurisdiction was proper at the time of
judgment, not only must we justify the presence of the United
States in the dispute, but we must also demonstrate how §
2410(a)(5), which covers actions in interpleader or in the nature
of interpleader, applies to the parties’ actions in this dispute.
Once the applicability of § 2410(a) is established, federal
subject matter jurisdiction is present on the basis of § 1444.
1. General Construction of § 2410(a)
The law is well settled that the government is not subject
to suit unless it has waived its sovereign immunity.12 As noted,
§ 2410 was specifically passed to waive the sovereign immunity of
the United States so that private parties could get the
government into court when necessary to quiet title or resolve
priority of liens or mortgages.13 Such waiver, however, must be
narrowly construed to comport precisely with congressional
intent.14 Thus, “no suit may be maintained against the United
States unless the suit is brought in exact compliance with the
12
See United States v. Testan, 424 U.S. 392, 399 (1976).
13
See Estate of Johnson v. United States, 836 F.2d 940, 943
(5th Cir. 1988); 28 U.S.C. § 2410(a).
14
See Estate of Johnson, 836 F.2d at 943.
8
terms of a statute under which the sovereign has consented to be
sued.”15
In conformity with this strict construction, we have found
at least three instances in which waiver of sovereign immunity
does not exist under § 2410(a). There is no waiver (1) when a
taxpayer seeks to challenge the validity of any underlying tax
assessment,16 (2) when the government is claiming a title
interest in property rather than a lien interest,17 or (3) when
the government no longer has a mortgage on, or other security
right in, the property in dispute.18
Even so, such strict compliance with the statute does not
imply that literal interpretation of § 2410's every word is
required. Standing together, the cases noted above simply
reiterate that § 2410(a) applies only when the issue concerns the
priority of an existing government mortgage or other security
interest. On this issue, the determination of sovereign immunity
is strict. In contrast, we and other courts have taken a more
inclusive approach to the types of underlying relief, such as
15
Koehler v. United States, 153 F.3d 263, 265-66 (5th Cir.
1998).
16
Montgomery v. United States, 933 F.2d 348, 349 (5th Cir.
1991).
17
Cummings v. United States, 648 F.2d 289, 292 (5th Cir. 1981).
18
See Koehler, 153 F.3d at 266-67.
9
quiet title and interpleader suits, to which § 2410(a) expressly
applies. Specifically, when the priority of a presently existing
lien interest of the government is in dispute, and the question
is whether § 2410(a) applies to the type of relief sought, the
statute has been read much more expansively.
In explaining the application of § 2410(a), we have found
that “jurisdiction does not depend on the specific relief sought,
[e.g.] foreclosure. Rather it rests on the existence of the
traditional controversy in which a private party asserts an
ownership which is superior to the claimed lien of the United
States Government.”19 Informing this approach is our recognition
of Congress’s conviction “that a means be available to determine
such disputes lest the absence of judicial recourse depress the
marketability of property subject to federal tax liens.”20 Other
courts have found the applicability of § 2410(a) to underlying
actions equally capacious.21
19
United States v. Morrison, 247 F.2d 285, 290 (5th Cir. 1957).
20
Estate of Johnson, 836 F.2d at 945.
21
See Progressive Consumer Fed. Credit Union v. United States,
79 F.3d 1228, 1231-32 (1st Cir. 1996) (hailing the substance over
the form of relief sought because Congress “was concerned not with
the niceties of common law pleading, but with practical problems
facing owners whose property was encumbered by government liens”);
City of New York v. Evigo Corp., 121 F. Supp. 748, 750 (S.D.N.Y.
1954) (ignoring the technical procedures used by the City of New
York and finding jurisdiction under §§ 2410(a) and 1444 because the
“purpose and effect of the action” concerned “priority for the
satisfaction of the respective tax claims out of the property
seized”). See also United States v. Coson, 286 F.2d 453, 457 (9th
10
In the instant case, the government maintains an outstanding
tax lien on Hussain’s property. Thus, § 2410(a) appears
applicable. Although the applicability of § 2410(a)(5) to the
suit as a whole remains to be discussed, our prior holdings and
our understanding of congressional intent predispose us to accept
the government’s presence in this case despite its unique mode of
entrance.
2. Breadth of Interpleader Actions under § 2410(a)(5)
Given the expansive approach to determining the kinds of
relief for which § 2410(a) is available, we next consider whether
§ 2410(a)(5) covers the state court motion practice instituted by
BOC after the judgment against it and in favor of Hussain and
Hibernia had become final and no longer appealable. Even though
establishing the applicability of this statute in terms of the
government’s interest and its waiver of sovereign immunity has
been accomplished, we are nevertheless required to decide whether
the post-judgment proceedings in this case come within the scope
of § 2410(a)(5). Specifically, we must determine (1) whether
BOC’s Motion to Determine Amount and Distribution of Funds
constitutes an action in interpleader within the contemplation of
§ 2410(a)(5), and (2) whether the government’s presence as
Cir. 1961) (interpreting the words “quiet title” broadly in
conformity with the text and the history of the statute).
11
respondent under a show cause order satisfies the statutory
requirement that the government be “named a party in any civil
action or suit.”22
a. Whether There Is an Action in Interpleader
Section 2410(a)(5) expressly covers both interpleader
actions and actions in the nature of interpleader. A traditional
interpleader suit is an equitable action available to a
plaintiff-stakeholder who is, or may be, exposed to multiple
liability or multiple litigation, usually when two or more claims
are brought that are mutually inconsistent.23 The purpose of
interpleader is to enable the plaintiff-stakeholder to avoid “the
burden of unnecessary litigation or the risk of loss by the
establishment of multiple liability when only a single obligation
is owing.”24 Thus, traditionally the claims of the defendant
claimants must be mutually exclusive and adverse to one another
such that one claimant’s gain in the stake would be another
claimant’s loss.25 In contrast to the subsequently evolved bill
22
28 U.S.C. § 2410(a).
23
See Gen. Elec. Credit Corp. v. Grubbs, 447 F.2d 286, 288 (5th
Cir. 1971), rev’d on other grounds, 405 U.S. 699, 705-06 (1972).
24
Texas v. Florida, 306 U.S. 398, 412 (1939).
25
See id. at 405-06; Grubbs, 447 F.2d at 288. In Grubbs, we
found that the plaintiff failed to assert a “viable” interpleader
because he had never shown that he would be multiply liable on the
same fund. Rather, we noted that the record suggested that he was
individually liable to each of his judgment holders. See Grubbs,
447 F.2d at 289-90. The Supreme Court ultimately reversed because
12
in the nature of interpleader, the stakeholder in a strict bill
of interpleader maintains no claim or interest in the stake.26
An “action in the nature of interpleader” is a term of art
that refers to those actions in which an interpleading plaintiff
asserts an interest in the subject matter of the dispute.27 In
all other respects, actions in the nature of interpleader are
identical to traditional interpleader suits. It is §
2410(a)(5)’s reference to suits in the nature of interpleader
that the district court appears to have relied on in finding
jurisdiction.28 The district court was incorrect in this
reading, however, because BOC had already disclaimed all interest
in the insurance proceeds when it filed its motion to determine
distribution of funds. Thus, BOC did not have the requisite
claim or interest in the fund that is required for the
even though removal may have been defective (because the
interpleader was not viable), the district court would have had
jurisdiction of the action had it been brought there originally.
See Grubbs, 405 U.S. at 702, 705-06.
26
See Texas, 306 U.S. at 406.
27
See id., at 406-07.
28
See Hussain v. Boston Old Colony Ins. Co., 170 F. Supp 2d.
663, 669 (E.D.La. 2001) (finding that BOC’s motion was in the
nature of interpleader because it was “intended to rank priority to
the real or personal property to which the United States (and
others) has a claim, which brings it squarely within the scope and
purpose of § 2410").
13
plaintiffs’ action to constitute one in the nature of
interpleader.
Even though we have not previously determined the precise
scope of an interpleader action under § 2410(a)(5), two primary
factors convince us that this provision applies to the facts of
this case. First, as noted above, we have taken an expansive
approach to determining the types of relief to which § 2410(a)
applies. Second, the equitable purpose of interpleader to
protect stakeholders from multiple liability and multiple
litigation has led us to construe its requirements liberally.29
In addition to the more traditional interpleader requirement that
two or more claimants have competing, mutually exclusive claims
to the stake, we have recognized that a plaintiff-stakeholder may
employ interpleader when its liability is limited and the
combined claims are in excess of such limited liability, even
though not mutually exclusive.30 Further, the Supreme Court has
counseled that when removal has occurred and jurisdictional
requirements otherwise have been met, any problems with party
labels are immaterial because the parties could have been
“realigned” by the court.31
29
See In re Bohart, 743 F.2d 313, 324-25 (5th Cir. 1984).
30
See General Electric Credit Corp. v. Grubbs, 447 F.2d 286,
289 (5th Cir. 1971).
31
Mackay 229 U.S. at 176.
14
In like manner, other courts at both the federal and state
levels have interpreted broadly which actions constitute an
interpleader. One older district court case in the Second
Circuit addressed a factual situation similar to the instant
case. In United States v. Webster Record Corp., a chemical
company was a state court judgment creditor of Webster Record
Corporation (Webster), which in turn was a depositor in (and thus
a creditor of) Bankers Trust Company (Bankers).32 To collect its
state judgment against Webster, the chemical company initiated
supplemental proceedings in state court against Bankers to
acquire the deposit that Bankers was holding for Webster.33
During these supplemental proceedings, the IRS served a notice of
levy on Bankers, demanding the deposit to satisfy a tax lien
against Webster.34 Instead of appearing in the supplemental
proceedings to determine lien priority over this deposit, the
government sued directly in federal district court to foreclose
on the lien.35
The district court recognized that any order directed at
Bankers to turn over the Webster deposit to the chemical company
32
192 F. Supp. 104 (S.D.N.Y. 1961).
33
See id. at 104-05.
34
See id. at 105.
35
Id.
15
would not bind the government, and thus would lead to further
litigation.36 Without using the label “interpleader,” the court
also recognized that there was a substantial dispute as to
priority of the claimants’ entitlement to the deposited funds.
As such, the appropriate action would be to join the government
as defendant in a state court suit to determine lien priorities;
yet, recognized the court, such an action undoubtedly would
provoke the government to remove the action to federal court
under the authority of § 2410(a). Thus, concluded the court, “it
would be an idle gesture to permit [the chemical company] to
proceed in the State Court, since its action would eventually be
removed to this Court.”37
In sum, the equitable purpose of interpleader to protect the
stakeholder from multiple litigation and liability (expressed in
Webster as the desirability of avoiding unnecessary litigation
later) and the purpose of § 2410 of resolving outstanding
government liens, outweighed any defects in the procedural
history. Louisiana courts have also recognized that a concursus
proceeding (Louisiana’s version of interpleader) “should be
construed liberally and given a broad application.”38 In short,
36
Id.
37
Id.
38
Damson Oil Corp. v. Sarver, 346 So. 2d 1304, 1307 (La. Ct.
App. 3d Cir. 1977); Asian Int’l, Ltd. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 435 So. 2d 1064, 1066-67 (La. Ct. App. 1st
16
the broad approach toward determination of the types of relief
available under § 2410(a) generally, in combination with the
equitable nature of interpleader to protect a stakeholder from
multiple liability and vexatious litigation, indicates that §
2410(a)(5) encompasses BOC’s actions.
It is true here that the motion practice of the parties did
not use the same labels as actions taken to initiate an
interpleader proceeding.39 Regardless of the misleading case
caption, however, the substantive posture of the parties mirrored
Cir. 1983) (recognizing that statutes governing concursus “are to
be construed liberally,” and thus holding that alternative
procedural devices may be used to invoke a concursus proceeding if
its substantive requirements are met). But see Hampton v.
Greenfield, 602 So. 2d 327, 329 (La. Ct. App. 4th Cir. 1992), rev’d
on other grounds, 618 So. 2d 859 (La. 1993) (finding that a
concursus proceeding may not be used to relitigate the issue of
liability). Under Louisiana law, “[a] concursus proceeding is one
in which two or more persons having competing or conflicting claims
to money, property or mortgages or privileges on property are
impleaded and required to assert their respective claims
contradictorily against all other parties to the proceeding.” La.
Code Civ. Proc. Ann. art. 4651 (West 2002).
39
Although the Supreme Court has indicated that defensive
interpleader under Rule 22 must be framed as either a cross-claim
or counter-claim, its emphasis on the form of pleadings was meant
to reiterate that rule interpleader is only proper when there is
“some nexus with a party already in the case.” Grubbs, 405 U.S. at
705 n.2. Thus, as in other areas of pleading, we construe the
pleading liberally according to its substance rather than its form
or label. See Indus. Dev. Bd. v. Fuqua Indus., Inc., 523 F.2d
1226, 1235 (5th Cir. 1975) (relying on the liberal pleading
standard of the federal rules to construe a complaint to include
request for relief on a theory of subrogation, even though the
complaint was not clear); 5 Charles Alan Wright & Arthur R. Miller,
Federal Practice & Procedure, § 1286, n.10 (2d Ed. 1990); 7 Wright
& Miller, Federal Practice & Procedure, § 1715.
17
the substance of an action in interpleader. By the time of
judgment in federal court, the parties had taken several
procedural steps that produced a situation in which BOC had
brought Hussain, Hibernia, Rando, and the government together to
contest the priority of liens and distribution of payments from
the insurance fund possessed by BOC.
Although BOC did not refer to “interpleader” or “concursus,”
and did not deposit the fund in the registry of the court, it
possessed an insurance proceeds fund of $500,000 in which it
claimed no interest and to which there were several claimants.
BOC had been found liable to Hussain and Hibernia under the
Policy; the IRS had served notice of a tax levy on BOC for the
money; and Hussain’s attorney, Rando, had asserted a right to
recover his contingent fee from the proceeds. In addition, those
four claimants sought satisfaction from the insurance proceeds
and, in the aggregate, their claims (1) exceeded the total amount
available in the fund, and (2) were adverse to each other.40
40
As noted, it is well settled that claims to the stake need
not be mutually exclusive. See 4 Moore’s Federal Practice §
22.03[1][d] (Matthew Bender 3d ed.). We and other courts have
also found that adversity of claims is satisfied when additional
claims to a fund are derivative of one particular claimant’s
right to the fund. See Bricks Unlimited, Inc. v. Agee, 672 F.2d
1255, 1257-58 (5th Cir. 1982). See generally 4 Moore’s Federal
Practice § 22.03[1][d], n.13.
18
Consequently, BOC had a genuine fear of multiple and vexatious
litigation.
To avoid that, BOC filed its Motion to Determine Amount and
Distribution of Funds with the Louisiana trial court, and asked
that court to order the IRS to show cause as to its interest in
the insurance proceeds fund. Similarly, in the federal district
court, BOC’s Motion to Determine Amount and Distribution of Funds
was an attempt to bring in all who claimed an interest in the
stake so that BOC would not be liable for an amount greater than
the limits of the insurance policy or have to defend multiple
suits. Thus, in conformity with the expansive approach taken
toward this form of the equitable relief, the actions of BOC were
sufficient in fact to constitute interpleader against the
government under the requirements of § 2410(a)(5).
b. Whether the Presence of the United States Pursuant
to § 2410(a) is Satisfied by the Order to Show Cause
The second interpretation issue presented is whether the
government’s presence in this suit by virtue of the state court’s
order to show cause satisfies § 2410(a)’s requirement that the
United States be “named a party in any civil action or suit.”41
We are aware of no case law, either in this circuit or elsewhere,
interpreting this particular phrase from § 2410(a). Furthermore,
41
28 U.S.C. § 2410(a).
19
the statutory construction of other language in § 2410 that we
have undertaken points in different directions. As described
above, we have narrowly construed the language waiving sovereign
immunity, but we have broadly interpreted the types of relief to
which this statute applies. As the requirement that the
government be “named a party in any civil action” relates more to
the form of relief sought in the underlying state court
proceedings than to the waiver of sovereign immunity, we
interpret “any civil action or suit” broadly to include the
instant orders to show cause because their purpose is to
determine the priority of claims to money or property.
The cases narrowly interpreting the waiver of sovereign
immunity are less applicable here because the nature of the
government’s interest, which triggers (or prevents) the waiver of
immunity, is not at stake. Rather, at issue here is simply the
procedure by which the government was brought into an action to
determine the ranking of its lien.
Additionally, applying § 2410 to these orders to show cause
comports with the statute’s purpose. On two occasions, Congress
has broadened the original section 2410(a), each time allowing
waiver of sovereign immunity in additional types of cases, so as
to enhance the ability of private parties to resolve issues of
ranking or priority when government liens are involved. The 1942
20
amendment, which extended the statute’s ambit to include quiet
title actions, “was in response to the recognized need for a way
to force disputes over government tax liens to resolution, rather
than leaving the United States in complete control of the
timing.”42 Similarly, in 1966, Congress wanted to expand the
waiver of sovereign immunity to cover more types of litigation so
that private parties could bring the government into those
additional kinds of cases.43 We discern a pattern over time in
Congress’s broadening of the applicability of § 2410(a) to
include more and more instances in which it was “desirable for
the Government to be a party in order to assert its interest.”44
Congress has clearly wanted the government to be amenable to suit
in an increasing variety of actions. In keeping with this trend
toward inclusiveness, we conclude that the government’s presence
in a suit, by virtue of an order to show cause as to the ranking
of its lien in a specific fund, comes within the statute’s
coverage; inclusion facilitates the statutory purpose of
resolving the priorities of those liens on property in which the
government has a security interest.
42
United States v. Perry, 473 F.2d 643, 645 (5th Cir. 1973).
43
See Sen. Rep. No. 89-1708, at 1966 U.S.C.C.A.N. 3722, 3754-
55.
44
Id. at 3755.
21
In combination, a more expansive approach to determining the
kinds of relief covered by § 2410(a) and the intent of Congress
to address the “practical problems facing owners whose property
was encumbered by government liens” instead of the “niceties of
common law pleading,”45 dictates § 2410(a)’s inclusion of an
order to show cause that brings the government into court to
answer a stakeholder’s call to determine lien priorities.
In sum, the district had federal subject matter jurisdiction
because this case met the requirements of § 2410(a) as well as
those of § 1444. Section 2410(a) only waives sovereign immunity
and does not create a basis for federal subject matter
jurisdiction. But, once it is deemed applicable in a state court
action, such as the one here, it makes available to the
government § 1444, which we have held creates a substantive right
of removal to federal court, regardless of other jurisdictional
limitations.46
45
Progressive Consumer Fed. Credit Union, 79 F.3d at 1231-32.
46
City of Miami Beach, 551 F.2d 1374 n.5. Even if § 1444
did not create independent federal subject matter jurisdiction,
or this case had been brought directly in federal court, this
interpleader-like action would appear to meet the requirements
for federal jurisdiction under § 1332. See 28 U.S.C. §
1332(a)(1). Section 1332 jurisdiction under Rule 22 (rule
interpleader) requires: (1) complete diversity of citizenship,
which is met when the stakeholder is diverse from all the
claimants, even if citizenship of the claimants is not diverse;
and (2) an amount-in-controversy that exceeds $75,000 exclusive
of interest and costs. See 4 Moore’s Federal Practice §
22.04[2][a]. In this case, complete diversity was present: BOC
22
C. Effect of a Final State Court Judgment
There is one remaining complication that we must resolve
before addressing to the merits of this appeal. Unlike any of
the cases discussed above, BOC’s interpleader-like actions were
not initiated until after the state court judgment (in a case
that the government was not involved in, as a party or otherwise)
that required BOC to pay the insurance proceeds to Hussain and
Hibernia “as their interests appear in the policy” had become
final and no longer subject to appeal. The Supreme Court has
interpreted the Full Faith and Credit Act to require that federal
courts grant the same preclusive effect to a state court judgment
as the state court would have given to it.47 Therefore, whether
the Louisiana court judgment is considered final, in that sense,
is a matter of state law.
The Louisiana Code of Civil Procedure provides that “[n]o
claimant may be impleaded in a concursus proceeding whose claim
is a Massachusetts corporation, and Hussain, Hibernia, and Rando
are Louisiana citizens. As the government is not a citizen of
any state, it is not considered in the complete diversity
calculus. See 4 Moore’s Federal Practice § 22.08[1], n.9. As
for the second prong of the test for diversity jurisdiction,
amount-in-controversy, the principal amount at stake of the
insurance fund is $500,000, well in excess of the $75,000
threshold. Thus, subject matter jurisdiction on the basis of
diversity would have been met.
47
See Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S.
75, 81 (1984); A.L.T. Corp. v. Small Bus. Admin., 801 F.2d 1451,
1455 (5th Cir. 1986).
23
has been prosecuted to judgment.”48 The purpose of this rule is
to protect the claimant, “who has prosecuted his claim to
judgment, and otherwise would be forced to relitigate the matter,
not only with the obligor, but with all other adverse
claimants.”49 In conformity with this language, the Louisiana
Supreme Court has held that when claims have been “established,”
they may not be impleaded in a later interpleader suit.50
Although the statutory language was adopted after the period
during which the court tackled these cases, its decisions give
contextual meaning to the provision. Review of the cases,
however, demonstrates that the requirements to preclude
subsequent interpleader by an “established” claim are neither
completely clear nor met in this instance.
In Victor v. Lewis, Louisiana’s highest court stated that
the law is well-settled that a “claimant who has been put to the
test of a trial by a surety, and has established his claim, may
not be impleaded later by the surety in an interpleader suit, and
compelled to prove his claim again with other adverse
48
La. Code Civ. Proc. Ann. art. 4652 (West 2002).
49
La. Code Civ. Proc. Ann. art. 4652, cmt. b.
50
See Am. Sur. Co. of N.Y. v. Ryan, 170 So. 34, 40 (La. 1936);
Am. Sur. Co. of N.Y. v. Brim, 144 So. 727, 730 (La. 1932).
24
claimants.”51 In Victor, a plaintiff had successfully sued a
real estate broker and an insurance company, as the broker’s
surety, for damages.52 The state court of appeal affirmed the
surety’s liability, but reversed and remanded for a determination
of quantum because the surety was entitled to offset its
liability by the value to the plaintiff of the use of some land.
The appellate court denied a rehearing requested by the surety,
and the Louisiana Supreme Court denied certiorari. On remand in
district court, the surety instituted a concursus (interpleader)
action and deposited the full amount of the bond with the court.
Rejecting this attempt at interpleader, the state supreme court
found that the plaintiff’s claim had been “finally and definitely
established” because three courts had reviewed the issue;53 the
remaining issue relating to the value of the land during the time
occupied by plaintiff was not enough to alter the conclusion that
the judgment was final.54
The same court rejected a plaintiff’s attempt at
interpleader under an almost identical set of facts in American
51
Victor v Lewis, 161 So. 597, 598 (La. 1935) (emphasis
added).
52
See id.
53
Id.
54
Id.
25
Surety Co. of New York v. Brim.55 The court reasoned that a
party who is aware of its ability to initiate concursus but
chooses not to bring such an action cannot do so after losing the
original suit. The court concluded that allowing interpleader
under those conditions would increase the amount of litigation,
thus working against the purpose of interpleader, and would force
a successful claimant to “accept a pro rata part of a fund...and
thereby largely cause her to lose the benefits of her
judgment.”56
In American Surety Co. of New York v. Ryan, yet another
factually similar case, the Louisiana Supreme Court rejected
American Surety’s attempt to recoup awards it had paid to
individual claimants after it had instituted a concursus
action.57 Apparently relying on the doctrine of novation, the
court characterized those plaintiffs as judgment creditors of
American Surety, no longer being claimants to a fund.58 The
factors on which the court relied were (1) the claims had been
reduced to judgment before American Surety made any deposit into
the registry of the court, (2) the judgments were executory
55
144 So. 727 (La. 1932).
56
Id. at 730.
57
170 So. 34 (La. 1936).
58
Id. at 39.
26
against any property or fund owned by American Surety, and (3)
American Surety had paid the judgments from other funds and
without reference to the court-deposited fund.59
In contrast to those conclusions, it was also in Ryan that
the court finally allowed interpleader against one claimant whose
claim the court determined was not “established.”60 This
claimant, Howland & Co (“Howland”), had won a judgment against a
different company, Home Accident Insurance Company, by suing its
ancillary receiver in a process that was more summary than
adversarial.61 Howland then successfully sued American Surety,
as surety of Home Accident Insurance Company, for payment on the
unpaid judgment.62 That judgment, however, was apparently never
signed, and American Surety filed a motion for rehearing and an
order for Howland to show cause why the rehearing should not be
59
Id.
60
Id. at 40.
61
The original suit was brought against the ancillary
receiver of Home Accident Insurance Company. The litigation,
according to the court, only consisted of a set of
interrogatories that the receiver answered, in which he
essentially admitted to liability if Howland’s proffered exhibits
were correct. It was on this basis that the court found in favor
of Howland, who then used the judgment to obtain a judgment
against American Surety. See id.
62
Id. at 37-38.
27
granted.63 The proceedings stopped there because American Surety
filed its interpleader action at about the same time.64
In rejecting Howland’s assertion that its claim was
established, the court found that Howland’s prior judgment was
based on insufficient proof; that it was never signed; and that
the motion for rehearing was never adjudicated.65 The court also
based its conclusion on the fact that the prior judgment was
executory only against American Surety for no more than the
amount of the bond it held, thereby restricting recovery to the
available proceeds from an insurance bond.66 The court surmised
that these factors prevented Howland’s claim from being
“established,” thereby freeing the stakeholding plaintiff to
bring Howland into a subsequent concursus proceeding.67
These Louisiana cases suggest that any plaintiff who has
prosecuted his case through the appellate levels and achieved a
judgment for which there is no further avenue of litigation
cannot later be brought into a suit in interpleader. And, at
first glance, the facts of our case suggest that Hussain and
63
Id.
64
Id.
65
See id. at 40.
66
See id. at 40-41.
67
Id.
28
Hibernia had indeed established their claims through a final,
executory judgment, thus blocking their being interpled
subsequently by BOC: Hussain and Hibernia had prevailed at the
trial and appellate court levels, and BOC’s writ application had
been denied by the Louisiana Supreme Court, before the government
ever asserted its tax lien and, necessarily, before BOC could
have responded by filing its show cause motion. Thus, as
described in Victor, “th[e] matter was passed upon by three
courts in definitive judgments.”68
Closer scrutiny reveals, however, that this case is
distinguishable from prior decisions. The positions of the
parties in this case are factually different from past examples
of “established” claims such that this case does not come within
the scope of article 4652 of the Louisiana Code of Civil
Procedure prohibiting concursus (interpleader) against claimants
who have already prosecuted their claims to judgment.69
Like Howland, the unestablished claimant in Ryan, Hussain
and Hibernia’s aggregate recovery is limited to the policy
proceeds, and thus is not a general judgment against BOC itself.
The initial state court judgment held BOC liable to Hussain and
Hibernia for 500,000, “the policy limits under Business Owner’s
68
161 So. at 598.
69
La. Code Civ. Proc. Ann. art. 4652.
29
Xtra Policy...as their interests appear in the Policy.” In fact,
the trial court specifically rejected all other claims brought
against BOC, including those for penalties for arbitrary failure
to pay claims under the policy. Thus, as in Ryan, the trial
court specifically restricted the judgment to the amount of the
policy (plus interest and costs), and prohibited any recovery
against the insurance company in excess of that amount.
Furthermore, this case is unlike Brim, because it is not
clear that BOC had “knowledge of all the facts” such that it
could have chosen to proceed in concursus originally.70 During
the liability stage of this litigation, only Hussain and Hibernia
had made claims to the insurance proceeds. Although a situation
in which two parties sue for the same funds is often ripe for
concursus, such is not the case when the combined claims fail to
exceed the fund and are not mutually exclusive. As Hibernia’s
claim was derivative of Hussain’s and as the cases were
consolidated relatively early in the litigation, there was
apparently no fear of multiple liability or multiple litigation
to prompt BOC to file a concursus proceeding. In fact, notice of
the IRS lien on Hussain’s property and its threatened legal
action did not appear until December 2000, which was subsequent
to the Louisiana Supreme Court’s denial of certiorari.
70
Brim, 144 So. at 730.
30
It is also evident that further proceedings in this instance
likely would not increase litigation. Regardless of whether the
government remains a party, the merits of this case indicate that
Rando and Hibernia would continue to dispute the priority of
their claims in the fund: A court would still have to sort out
which contingency fee percentage Rando was entitled to receive,
and whether the demand for expert fees was proper. Thus, even if
a concursus or interpleader were not allowed in this case,
additional litigation would still arise.
Neither would Hussain lose the benefits of his judgment if
interpleader were allowed. State court litigation ensured that
BOC was liable to Hussain and Hibernia for the full policy
proceeds plus interest and costs. Further litigation would not
alter the judgment against BOC. If future litigation should
force Hussain to accept a reduced recovery, it will be because
the government partially satisfies its tax lien against Hussain
through the interpleader proceeding; but the government would
have obtained this result regardless. Without interpleader,
Hussain would have taken the remaining policy proceeds, and would
have been forced to pay these proceeds in separate litigation
with the government to satisfy tax arrearages. Allowing
interpleader simply skips this unnecessary step, and enables the
government to collect without engaging in duplicative litigation.
31
Finally, this case is unlike Victor v. Lewis because of the
remaining substantive legal issues requiring resolution. The
Victor court found that factual determination of the value of
land occupancy did not upset the “established” character of the
plaintiff’s claim. Here, in contrast, the parties will continue
to advance substantive legal disputes after the finding of
liability. Such issues do not call into question the final
judgment against BOC, but they are significant enough, in our
view, to allow litigation to continue through interpleader.
In conclusion, even though Hussain and Hibernia’s judgment
against BOC is a final, unalterable state court judgment, it is
not “established” in the sense of Louisiana jurisprudence and
does not preclude a subsequent interpleader-like action under
these unique facts. The state court judgment was specifically
limited to the insurance policy proceeds and it was not
practical, or expected, for BOC to attempt an interpleader-like
action until it became aware of the government’s lien.
Furthermore, none of the dangers that accompany subsequent
interpleader are present. The remaining issues concern
substantive questions of priority, and would have arisen even in
the absence of this interpleader-like action. If Hussain’s award
is reduced, it will be because of Hussain’s own tax liabilities
and not because of an independent claim to the fund. Allowing
32
this action may actually bring a benefit to Hussain, because it
preempts separate litigation between him and the government and,
as a result, saves him attorney fees in such an action. Thus,
because these proceedings do not threaten relitigation or the
reconsideration of BOC’s liability, but instead provide a
potential benefit to Hussain, we see no reason why an
interpleader-like action should not have proceeded in this
particular case.
D. Amount of Attorney Fees
Having resolved jurisdictional and final judgment
ambiguities, the first merits issue is whether Rando was entitled
to have attorneys’ fees calculated on Hussain’s net recovery
under the insurance policy, as the district court held, or on his
gross recovery, as Rando argues. An alternative way of viewing
the question is: Does Hibernia, as a named loss-payee mortgagee,
prime the secured claim of Rando, the insured’s attorney, in the
distribution of insurance proceeds from BOC?
The district court gave priority to Hibernia over Rando,
reasoning that “the loss payee-mortgagee (Hibernia) is entitled
to the proceeds of the policy to the extent of the mortgage debt,
with any surplus then payable to the insured-mortgagor
(Hussain).”71 Rando argues on appeal that (1) Hibernia is a loss
71
Hussain, 170 F. Supp 2d. at 670 (citing J.B. Durbin v.
Allstate Ins. Co., 267 So. 2d 779, 781 (La. Ct. App. 2d Cir.
33
payee under a simple or open loss-payable clause, not a standard
or union clause; (2) under an open loss-payable clause, the loss
payee recovers only if the insured recovers; ergo (3) Hibernia’s
right to recover is contingent on, and derivative of, Hussain’s
right to recover. In Rando’s view, this is the reason that the
state court awarded judgment in the insurance suit for Hussain
and Hibernia “jointly” —— as the Policy’s Loss Payable provision
required. Hence, Rando concludes, the contingency-fee rate
should apply to Hussain’s gross recovery from BOC, not to his
recovery net of BOC’s payment to Hibernia.
Hibernia counters that (1) Louisiana law clearly ranks the
loss-payee ahead of the insured; (2) there is no basis for
applying Rando’s contingency fee to Hibernia’s recovery; and (3)
Rando’s distinction between types of loss payees is irrelevant in
this case. Hibernia also emphasizes that it has independently
prosecuted this suit, having been the first to sue, thereby
interrupting prescription and commencing the accrual of judicial
interest.
Rando’s argument that he has priority over Hibernia has
little support in either statutory or case law. The relevant
state statute, La. Rev. Stat. § 9:5001(A), states:
A special privilege is hereby granted to attorneys at
law for the amount of their professional fees on all
judgments obtained by them, and on the property
1972)). 34
recovered thereby, either as plaintiff or defendant, to
take rank as a first privilege thereon superior to all
other privileges and security interests under Chapter 9
of the Louisiana Commercial Laws.72
Even from the statute alone, one might conclude that “judgment
obtained by them,” in a consolidated case, refers to the judgment
an attorney obtains for his client, and not any amount obtained
by another party. This view is reflected both by our decisions
and those of the Louisiana courts.
On several occasions, we have recognized that “when a
mortgagee is designated as the loss payee, the insured in effect
appoints him to receive payment under the policy.”73
It is well established as the law of Louisiana that
where insurance is taken out by the mortgagor for the
benefit of mortgagee, or is made payable to the
mortgagee as his interest may appear, the mortgagee is
entitled to the proceeds of the policy to the extent of
his mortgage debt, holding the surplus, if any, after
the extinguishment of his debt for the benefit of the
mortgagor. Adams v. Allan, La. App., 19 So.2d 578 (1st
Cir. 1944).74
We have gone so far as to apply this principle to create an
equitable lien in favor of the mortgagee, entitling it to recover
72
La. Rev. Stat. Ann. § 9:5001(A) (West 2002).
73
Walter v. Marine Office of Am., 537 F.2d 89, 98 (5th Cir.
1976) (citing Diaz v. Cherokee Ins. Co., 275 So. 2d 922, 925 (La.
Ct. App. 1973)). Walter turned on whether there should be an
exception to this general rule when the mortgagor makes repairs
after an accident damaging the mortgaged property, and this Court
held in the negative. Id. at 97-99.
74
Id. at 99.
35
insurance proceeds, even when the insurance policy did not name
the mortgagee as a loss payee.75
Rando cites Lazlo v. State Farm Fire & Casualty Co.,76 for
the proposition that he should recover on the gross amount BOC
paid out, not merely the net amount. But, as Hibernia and the
government assert, Lazlo is distinguishable. In that case, fire
consumed a house that was insured and mortgaged; and, as here,
the mortgagee was a named loss payee in the insurance policy.77
Unlike this case, however, the insurance company in Lazlo
purchased the mortgage from the mortgagee.78 Litigation over the
arson issue resulted in cancellation of the mortgage. We held
that the mortgage became property “recovered” for the homeowner
through the arson litigation; the value of the mortgage, under
75
Am. Gen’l Fire & Cas. Co. v. Reese, 853 F.2d 370, 373-74 (5th
Cir. 1988) (“Of course, the general law in Louisiana is that where
an insurance policy is taken out by a mortgagor for the benefit of
a mortgagee, the mortgagee is entitled to the proceeds of the
policy to the extent of the mortgage debt due at the time of
loss.”).
76
796 F.2d 807 (5th Cir. 1986).
77
Id. at 808.
78
Id.; id. at 811 (“It is crucial in this connection that State
Farm did not ‘pay off’ the mortgage; it bought the mortgage.
Consequently, if there had been a judgment in State Farm’s favor
[on the arson issue], Lazlo could have been sued under the
mortgage....”).
36
La. Rev. Stat. § 9:5001, was thus to be included in the
attorneys’ fees privilege.79
At first glance, it does appear difficult to distinguish
Lazlo meaningfully from this case: Both plaintiffs had loss-
payee provisions in their mortgages directing the insurance
company to pay the mortgagee in the event of losses to the
mortgaged property. The most significant difference is that the
insurance company bought the mortgage from the mortgagee in Lazlo
and cancelled it after litigation.80 This difference, however,
in no way increased the insured’s recovery beyond the surplus
after satisfaction of the mortgage; neither does it reflect any
greater professional effort on the part of Lazlo’s attorney.
Irrespective of whether the mortgage was bought and cancelled,
the loss-payee provision made certain that the professional
efforts of Lazlo’s lawyer would never have produced a recovery of
more than the surplus policy funds. If the mortgage had not been
cancelled, then the insurance company likely would have paid
79
Id. at 812 (“It is clear for fee privilege purposes that such
cancellation at least comprises ‘property recovered’ by counsel for
Lazlo.”) (emphasis in original).
80
Another difference, as noted by the district court, is that
the fee agreements themselves differed because Lazlo’s payment plan
assigned to his attorney “(40%) per centum $60,000 plus interest
and costs any and all sums collected or rights and/or interest
obtained,” Lazlo, 796 F.2d 810 n.3, while Hussain’s fee agreements
with Rando spoke in terms of “any recovery” and “gross recovery”.
Hussain, 170 F. Supp 2d. at 671-72. It is not apparent that this
difference should have any legal ramifications, however.
37
itself the funds due under the loss-payee provision, thereby
paying off Lazlo’s mortgage. Thus, if Lazlo’s reduced recovery
was a foregone conclusion because of the loss-payee provision, it
is hard to see why Rando should be deprived of the fees on the
total policy when the loss payee provisions similarly reduced
Hussain’s recovery.
Nonetheless, Lazlo remains distinguishable. Assigning the
mortgage to the insurer may seem like a procedural technicality
as far as the insured’s ultimate recovery is concerned, but it
did have the practical effect of covering the mortgagee’s
interest in the mortgage. Unlike the mortgagee in Lazlo, the
mortgagee in this case, Hibernia, did not convey or assign the
mortgage to BOC. Instead, it pursued litigation on its own to
protect the amount it was entitled to receive as loss-payee.
Although Rando is correct that to recover Hibernia needed
Hussain, that statement is only correct insofar as Hussain’s
action may have been a technical prerequisite to recovery from
BOC.
The law is clear that even under an open or simple loss
payable provision, such as the one in operation here, the
mortgagee has a direct claim to the insurance proceeds up to the
amount necessary to cover the outstanding balance on the
38
obligation secured by that mortgage.81 The only drawback with
this type of provision, as opposed to a standard or union clause,
is that the mortgagee cannot recover if the insured is somehow at
fault for the loss. Thus, if Hussain’s presence in the suit was
necessary at all, it was merely to allow a defense against arson
allegations. As Hibernia notes, it initiated litigation itself a
year before Hussain sued; and Hibernia obtained a judgment
against Hussain which liquidated the amount due to it under the
loss-payable provision.
This difference from Lazlo is material. Unlike Lazlo, the
mortgagee’s financial interest was not satisfied through an
assignment. Instead, the mortgagee litigated to ensure its
receipt of the amount outstanding on the note. Thus, Rando
cannot alone claim credit for recovering the amount that was due
directly to Hibernia as a result of the loss payee provision;
neither was he the only lawyer —— or even the first one ——
presumably working to refute the arson allegation. In light of
81
See Ingersoll-Rand Fin. Corp. v. Employers Ins. of Wausau,
771 F.2d 910, 913 & n.3 (5th Cir. 1985) (noting the difference
between standard and simple clauses by explaining that “[t]he
latter simply provides that the proceeds of the policy shall first
be paid to the mortgagee as his interest appears, but it does not
provide a separate undertaking that the mortgagee’s interest shall
not be impaired by any act or neglect of the insured-mortgagor.”);
Whitney Nat’l Bank of New Orleans v. State Farm Fire & Cas. Co.,
518 F. Supp. 359, 361-62 & n.2 (E.D.La. 1981) (quoting insurance
treatise language to explain the difference).
39
the well-established character of Hibernia’s right to the money,
and the work of its counsel in the litigation, Rando is not
entitled to an award of fees on that portion of the recovery.
Finally, despite any remaining similarities between Lazlo
and this case, the weight of authority both in our precedent and
under Louisiana’s indicates that a mortgagee’s rights under a
loss-payee provision vest automatically when a loss-causing
incident occurs.82 As a result, any amount ultimately recovered
by Hussain was certain to be, from the outset, net of the
outstanding balance on his mortgage to Hibernia.83
Simply stated, then, Rando’s contentions that (1) he has
priority over Hibernia, and (2) his fee should be calculated on
the gross amount paid out by BOC rather than the net amount
recovered by Hussain, are wrong. Thus, we affirm the district
court’s allowance of the net amount only.
E. Appropriate Contingency Fee Percentage
82
See Walter, 537 F.2d at 99 (recognizing that the mortgagee’s
rights vested at the time of the accident) (citing Wray-Dickinson
Co. v. Commercial Credit Co., 192 So. 2d 769 (La. Ct. App. 1939);
Pearson v. Rapstine, 203 F.2d 313, 315 (5th Cir. 1953); Durbin, 267
So. 2d at 781.
83
Rando’s reliance on Lerner Stores Corp. v. Elec. Maid Bake
Shops is similarly misplaced: There we held that a mortgagee was
not entitled to priority for the mortgagee’s own attorneys’ fees,
and the case did not adjudge the relative priorities of a loss
payee-mortgagee and the insured-mortgagor. 24 F.2d 780, 781 (5th
Cir. 1928).
40
Rando also contends that the district court erred in
applying as his contractual contingency fee percentage the 33
1/3% figure from his 1995 fee agreement with Hussain rather than
the 39% figure from their 2000 fee agreement. The district court
concluded that Rando’s super-priority for attorney’s fees under
26 U.S.C. § 6323(b)(8) only applied to his success in having BOC
held liable for the insurance proceeds, not his post-judgment
effort to collect the monies.84 Thus, reasoned the court, Rando
only deserved fees under this provision for the work done
pursuant to the 1995 agreement, which specified a contingency fee
of 33 1/3%. On appeal, Rando chiefly argues that under Louisiana
law, “the highest reasonable contingency fee controls.”
No party disputes that Rando’s effort to achieve a judgment
against BOC for the insurance fund entitles him to a super-
priority ranking for his fees over the federal tax lien. Rather,
the issue is whether Rando can substitute a higher contingency
fee percentage after the adjudication of BOC’s liability but
before any of the funds are actually distributed. Stated
differently, we must determine whether § 6323(b)(8)’s super-
priority ranking attaches when BOC’s is found liable, or when the
proper distributions from the insurance fund are actually
84
Hussain, 170 F. Supp 2d. at 672.
41
determined. To answer this question, we must first determine the
scope of the term “judgment” as used in the relevant statute.
Section 6321 of the Internal Revenue Code establishes “a
lien in favor of the United States upon all property and rights
to property, whether real or personal” against a delinquent
taxpayer.85 This lien attaches at the time of assessment and to
all property owned or subsequently acquired by the taxpayer.86
Section 6323(b)(8) creates an exception to this federal tax lien
priority. In part, it provides that a previously filed federal
tax lien shall not be valid, “[w]ith respect to a judgment or
other amount in settlement of a claim or of a cause of action, as
against an attorney who, under local law, holds a lien upon or a
contract enforcible [sic] against such judgment or amount, to the
extent of his reasonable compensation for obtaining such judgment
or procuring such settlement.”87 The announced purpose of this
provision is to provide an incentive to attorneys to enhance the
value of a taxpayer’s property, which would ultimately increase
the government’s revenue collection.88
85
26 U.S.C. § 6321 (2000).
86
See Tex. Commerce Bank-Fort Worth, N.A. v. United States, 896
F.2d 152, 161 (5th Cir. 1990); Centex-Landis Constr. Co. v. United
States, No. CIV.A.99-1968, 2000 WL 1039475, at *2 (E.D.La. May 9,
2000).
87
26 U.S.C. § 6323(b)(8) (2000).
88
See Reed & Steven v. HIP Health Plan of Fla., Inc., 81 F.
Supp 2d. 1335, 1338 (S.D.Fla. 1999); S. Rep. No. 89-1708, at 1966
42
We have already determined that, because of continuing
disputes about the proper distributions from the insurance fund,
the adjudication of BOC’s liability constituted a final state
court judgment, but did not preclude a subsequent interpleader-
like action. This portion of the case asks, as a question of
law, whether the “judgment” of which § 6323(b)(8) speaks requires
actual distribution of the fund or merely a determination of
liability. As such, the issue requires our de novo review.
We have not had the opportunity to interpret § 6323(b)(8) in
the context of the specific issue we review today. Other courts
have concluded that “obtaining such judgment”89 means that an
attorney must have created a fund which increases the taxpayer’s
taxable property.90 Thus, it is fairly well-settled that the word
“judgment” as used in § 6323(b)(8), must be read in light of the
statute’s purpose; that is, the creation of a fund that increases
the taxpayer’s property for the ultimate benefit of the IRS.
U.S.C.C.A.N. 3722, 3727 (“An attorney’s fee in such a case can be
thought of as similar in concept to the repairman’s charge in that
it can be expected to enhance the value of the taxpayer’s
property.”).
89
26 U.S.C. § 6323(b)(8).
90
See Reed & Steven, 81 F. Supp 2d. at 1338; United States v.
McGaughey, No. 93-CV-196-WDS, 93-30173, 90-3475-WDS, 1999 WL
282780, at *3 (S.D. Ill. March 24, 1999). See also Rosenman &
Colin v. Richard, 850 F.2d 57, 61 (2d Cir. 1988) (interpreting a
similar New York statute to limit the attorney’s lien to the fund
created or property obtained in a judgment won on behalf of her
client).
43
What is required to create such a fund is much less clear.
Although to our knowledge no court has addressed the precise fact
pattern that is now before us, other courts have confronted this
general question in slightly different contexts. For instance,
some courts have taken “a more expansive view of what constitutes
the creation of such a fund.”91 These fora have found that both
recovery of seized funds from the government92 and efforts to
obtain confirmation of an arbitration award93 constitute fund
creation within the intendment of § 6323(b)(8). Another court
has concluded that “judgment” in the statute “refers both to the
judicial act and that which in whole or in part satisfies the
‘judgment’,” suggesting that fees charged for efforts to collect
a judgment deserve super-priority treatment as well.94
In contrast, appearing more restrictive, several courts have
held that such other activities fail to create a fund and thus
fail to constitute a judgment under the statute. One court has
91
Warner v. United States, No. J-C-94-210, 1995 WL 693188, at
*4 (E.D. Ark. Sept. 19, 1995) (citing Markham v. Fay, NO. 91-10821-
Z, 1993 WL 160604, at *7 (D. Mass. May 5, 1993) and Chicago Title
Ins. Co. v. Kern, 81-2 U.S.T.C. (CCH) ¶ 9696 (D.D.C. 1981)).
92
See United States v. N.Y. State Dep’t of Taxation and Fin.,
138 F. Supp 2d. 392, 398-399 (W.D.N.Y. 2001).
93
See Blimpie Int’l, Inc. v. Peacox Ventures, L.L.C., No. C-00-
1510 VRW, 2001 WL 1155076, at *3 (N.D. Cal. Sept. 19, 2001).
94
McGinley v. United States, 942 F. Supp. 1239, 1244 n.3 (D.
Neb. 1996).
44
found, for example, that the filing of a suit against a party who
responds by interpleading the plaintiff and depositing an amount
into the court registry is not enough to constitute creating a
fund and thereby a “judgment” from which attorney fees are
warranted.95 Similarly, courts have concluded that interlocutory
decisions, even if creating new funds, do not come within the
statutory meaning of “judgment.”96
These cases provide little clear guidance for us because
they neither establish a uniform interpretation nor address the
particular circumstances of this case. We face a situation here
in which the issue of BOC’s liability has been exhausted in state
courts and accepted as final in federal court. The final
resolution of this case, however, is still open because some of
the parties continue to compete for priority and quantum of the
limited insurance proceeds. Even though the judgment here may
not be final in terms of all distribution issues, however, it is
final in that, in the end, BOC cannot avoid or reduce its
95
See Centex-Landis Constr. Co., 2000 WL 1039475, at *2.
96
See McGaughey, 1999 WL 282780, at *3-4 (stating that even if
an interim compensation order created new funds and was procured by
the attorney, such interim orders are “not the type of ‘judgment’
to which the statute refers”); McGinley, 942 F. Supp. at 1245
(finding that an interlocutory decision does not constitute a
“judgment” because it “lacks the fundamental character of finality
that distinguishes the common understanding of the word ‘judgment’
from other court orders”).
45
obligation to pay out all the insurance fund proceeds and
interest.
If we were to conclude that creation of a fund, and thus the
term “judgment,” requires actual distribution, § 6323(b)(8) would
give super-priority to all the fees charged, from the very
beginning through the very last distribution from the fund. The
renegotiation of the contingency fee, as a result, would appear
to apply to whatever is the final distribution. The problem with
this interpretation is that the outcome it dictates undermines
the purpose of § 6323(b)(8), i.e., increasing the value of the
taxpayer’s property to better satisfy outstanding tax liens.
Once BOC is found liable, the fund is created; any subsequent
effort cannot increase the amount of the insurance proceeds or
the government’s recovery. Indeed, because there is a limited
fund available for distribution, the outcome advocated by Rando
would increase his fees but decrease Hussain’s potential
recovery. Reducing Hussain’s potential recovery to add to
Rando’s take would, in turn, reduce the property available to
satisfy the tax lien. Such a result is diametrically opposed to
that intended by Congress in enacting § 6323(b)(8).
In contrast, applying § 6323(b)(8) only to Rando’s effort in
securing BOC’s liability comports with the purpose of the
statute. The point at which BOC is held liable is the point at
46
which a fund is created in the taxpayer’s favor. Any litigation
subsequent to this point, albeit necessary to bring the case to
its final conclusion, does nothing to increase the value of the
taxpayer’s property. Indeed, as indicated above, negotiation of
a higher contingency fee would actually reduce Hussain’s
theoretical recovery and thereby diminish the value of the
property available to satisfy the federal tax lien.
Furthermore, this conclusion is not likely to lessen the
incentive of attorneys in cases of this nature as it does not
preclude super-priority treatment of attorney fees. For his
effort in finding BOC liable, Rando will still receive fees
equaling 33-1/3% of Hussain’s recovery. Thus, lawyers in future
cases will still have an incentive to represent delinquent
taxpayers.
We conclude that only the fees earned in litigating BOC’s
liability deserve super-priority under § 6323(b)(8), and these
fees are assessed pursuant to the original 33 1/3% contingent fee
agreement. As this is the approach taken by the district court,
we affirm its ruling on the issue.
F. Award of Expert
The final substantive issue concerns whether the district
court erred in reducing the expert fee of John Theriot, CPA, from
$24,509.50 —— the amount he billed, which the court described as
47
“obscene” —— to $5,000, and awarding that reduced amount.97 On
appeal Rando simply argues that the attorney’s privilege to fees
under La. Rev. Stat. 9:5001 extends to all court costs and
litigation expenses advanced by the attorney for the client’s
benefit. The government, on the other hand, contends that Rando
was entitled to no expert fee for Theriot because he never
testified; and in the alternative, that the district court’s
assessment was reasonable.
The district court accepted Rando’s contention that Theriot
would have been called had the case gone to trial instead of
being concluded by directed verdict, and therefore reasoned that
some fee was appropriate.98 The court justified the reduced fee
by applying Louisiana’s balancing test for allocating experts’
fees, which weighs such factors as (1) the amount of time the
expert spends in preparing for trial; (2) the amount of time he
spends in court; (3) his expertise; (4) the amount he charges;
(5) the amount involved in the award; and (6) the degree to which
the opinion of his experts aid the court.99
Our review of the district court’s opinion is conducted
under the very deferential abuse of discretion standard. Even
97
Hussain, 170 F. Supp. 2d at 675.
98
See id.
99
Viator v. Liverpool & London S.S. Prot. and Indem. Ass’n, 97-
262,(La. App. 3 Cir. 10/8/97), 701 So. 2d 487, 497.
48
under this standard, however, we must conclude that, in this
instance, the district court abused its discretion by granting
any fee whatsoever.100
It is well settled under Louisiana law that, because costs
can be awarded pursuant to statute only, and because Louisiana
has no statute that provides costs for the fees of experts who do
not testify, any taxation for such fees as costs is an error of
law and thus an abuse of discretion.101 This is consistent with
Louisiana’s rule that, if a deposition is not used as evidence at
trial, the costs in procuring it cannot be taxed as costs.102
The district court acknowledged the rule that fees of
experts who do not testify cannot be taxed as costs, but
concluded that because Rando intended to call Theriot and was
100
See United States v. Logan, 861 F.2d 859, 866 n.5 (5th
Cir. 1988) (“abuse of discretion is a phrase which sounds worse
than it really is; it is simply a legal term of art which carries
no pejorative connotations”) (citation and internal quotation
marks omitted).
101
See State Dep’t of Highways v. Salemi, 193 So. 2d 252, 254
(La. 1966) (“Since they were not called to testify in court, we are
of the view that the amount of the fee paid these experts cannot
properly be considered an item of the costs awarded in the
compromise judgment.”); Moran v. Harris, 93-2227, *3 (La. App. 1
Cir. 11/10/94), 645 So. 2d 1248, 1249-50; Allstate Ins. Co. v.
Aetna Cas. and Sur. Co., 93-0588 (La. App. 1 Cir. 3/11/94), 634 So.
2d 49, 50 (holding that award of fee for expert in case that was
involuntarily dismissed before trial was an abuse of discretion);
Haas v. Ledoux’s Estate, 427 So. 2d 12 (La. Ct. App. 3d Cir. 1983)
(upholding denial of fees).
102
See Moran, 645 So. 2d at 1249-50.
49
only prevented from doing so by the court’s rendering of a
directed verdict, some such costs should be awarded. Louisiana
precedent indicates, however, that the reason an expert does not
or is unable to testify is irrelevant. Courts have held in
particular that such costs should be denied even when an expert’s
inability to testify arises involuntarily.103
Regardless of the court’s role in preventing Theriot’s
testifying, the fact remains that he never testified in person
and never had a report or other testimony, such as deposition or
affidavit testimony, entered into evidence. Louisiana law
dictates unequivocally that, under these circumstances, none of
Theriot’s charges can be taxed as costs.
III. Conclusion
For the reasons stated herein, we affirm the district
court’s holdings as to (1) subject matter jurisdiction, and (2)
the priority and amount of BOC’s distributions from the insurance
proceeds fund to Hibernia, Rando, and the United States,
including the court’s ruling on the appropriate contingency fee
103
See id. at 1249 (explaining that the expert was unable to
testify because of an injury); Parish of Jefferson v. Harimaw,
Inc., 297 So. 2d 694, 698 (La. Ct. App. 4th Cir. 1974) (holding
that “the defendant cannot recover the fees paid experts in
preparation for expropriation litigation who give no testimony via
depositions nor who are 'used on the trial' when suit is properly
dismissed by the plaintiff without prejudice”).
50
percentage used in calculating Rando’s recovery and the principal
sum to which that percentage should be applied. We reverse,
however, the district court’s taxation of any part of Theriot’s
expert fee as costs. We therefore vacate the court’s original
judgment and remand with instructions for the district court to
enter a new judgment with updated and corrected distribution
amounts, and with no award of expert witness fee.
AFFIRMED in part; REVERSED in part; and REMANDED with
instructions.
51
Hussain v. Boston Old Colony Insurance
Court: Court of Appeals for the Fifth Circuit
Date filed: 2002-11-01
Citations: 311 F.3d 623
Copy Citations