United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
November 19, 2004
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 04-60178
_____________________
J. STEPHEN NAIL, ET AL.,
Plaintiffs,
INTERVEST CORPORATION,
Plaintiff - Appellant,
versus
MELQUIADES R. MARTINEZ, SECRETARY, DEPARTMENT
OF HOUSING & URBAN DEVELOPMENT,
Defendant - Appellee.
__________________________________________________________________
Appeal from the United States District Court
for the Southern District of Mississippi
_________________________________________________________________
Before GARWOOD, JOLLY, and BARKSDALE, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This appeal raises issues relative to a defendant’s right to
recover attorney’s fees against the government under the Equal
Access to Justice Act (“EAJA”). Intervest Corporation
(“Intervest”) manages several properties that receive subsidies
from the federal Department of Housing and Urban Development
(“HUD”). On January 3, 2002, HUD debarred both Intervest and J.
Stephen Nail, Intervest’s sole shareholder and president.
Intervest and Nail challenged this decision and prevailed after the
district court determined that HUD’s debarment decision was
“arbitrary and capricious.” In the case now before the court,
Intervest seeks an award of attorney’s fees and costs under the
EAJA for its successful defense in the debarment case.
This appeal presents two potential questions. The district
court dismissed the complaint and denied attorney’s fees to
Intervest in this case on the basis that Intervest was not the
“real party in interest.” The question thus presented is whether
the district court erred in adopting the real party in interest
test under the EAJA. If we conclude that this was error, and
reverse the district court’s judgment that held for HUD, HUD
presents the second question: Whether the district court erred in
concluding that HUD’s litigating position in that earlier
proceeding was not “substantially justified” because, ipso facto,
HUD’s debarment of Nail and Intervest was “arbitrary and
capricious.”
Indeed, we do reverse the district court’s adoption of the
real party in interest test because that test is not consistent
with the plain language of the EAJA. Thus, we are required to
decide the second question and we conclude that a finding that
HUD’s underlying action was “arbitrary and capricious” does not, in
itself, mean that HUD acted without “substantial justification.”
In sum, we reverse in part, vacate in part, and remand for the
district court’s further consideration of Intervest’s claim for
attorney’s fees.
I
2
We begin with some background, including reference to the
cases that preceded and underlie the one before us today.
Intervest is a property management company that manages over sixty
properties, several of which are subsidized through HUD’s Farmer’s
Home Administration. Intervest is a subchapter-S corporation,
meaning that all of the corporation’s income is passed on to its
shareholders for tax purposes. J. Stephen Nail is the owner,
president, and chief executive officer of Intervest. Intervest
monthly submitted Housing Assistance Payment (HAP) vouchers, which
contained a certificate indicating that each unit for which a HUD
subsidy was requested was in “decent, safe, and sanitary
condition.”
In 1998, the United States sued Nail and Intervest under the
False Claims Act, 31 U.S.C. § 3729, alleging that Nail and
Intervest violated their contractual obligations by submitting
false claims with regard to these subsidized units. The district
court dismissed the case on summary judgment after finding that HUD
paid the claims fully aware of the condition of the subsidized
units at Metro Manor, and after concluding that the allegedly false
certification was not substantively material to the government’s
decision to pay the HAP. United States v. Intervest Corp., 67 F.
Supp. 2d 637, 640 (S.D. Miss. 1999). HUD took no appeal.
Next, on January 2, 2002, HUD’s Debarring Official debarred
Nail and Intervest for failing to maintain two Mississippi
properties in “decent, safe, and sanitary condition.” In reaching
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the decision on debarment, the Debarment Official contended that
Nail and Intervest were required to maintain the properties with
private funds, if necessary. Nail and Intervest were to be
debarred for a term of three years.
Nail and Intervest reacted promptly. On March 28, 2002, they
filed a lawsuit in the district court seeking a declaratory
judgment that they were illegally debarred by HUD and seeking an
injunction to restore them to good standing with HUD. On December
2, the court granted the summary judgment motion of Nail and
Intervest because it found that there was no requirement that
property owners invest private money to maintain properties in
compliance with HUD regulations. The court determined that HUD’s
debarment decision was “arbitrary and capricious.” HUD took no
appeal.
This district court ruling prompted the case before us today.
On February 28, 2003, Intervest filed an Application for Recovery
of Fees and Costs under the EAJA, 28 U.S.C. § 2412. Nail did not
join this action because his net worth made him ineligible for an
award under the EAJA.1 In ruling on Intervest’s application, the
district court noted that under the EAJA, a lack of substantial
justification for the government’s action creates a presumption
that Intervest, as the prevailing party, is entitled to attorney’s
1
“‘[P]arty’ means (i) an individual whose net worth did not
exceed $2,000,000 at the time the civil action was filed[.]” 28
U.S.C. § 2412(d)(2)(B).
4
fees. In this connection, the district court held that because the
court had earlier deemed HUD’s debarment of Nail and Intervest to
be “arbitrary and capricious,” it “must find that the government’s
position was not substantially justified.” (Emphasis added).
The district court, however, then turned to apply the “real
party in interest” test and found that because Intervest was Nail’s
alter ego, Nail was the real party in interest. Therefore, because
Nail was ineligible for an EAJA award, the court held that
Intervest was not entitled to fees and costs under the EAJA.
Intervest appeals this ruling, and HUD challenges the district
court’s holding that its position in the underlying litigation was
not “substantially justified.”
II
Thus, we first note that neither party to this appeal is
completely satisfied with the district court’s decision; although
the district court ultimately dismissed the case, its decision
ruled both for and against, respectively, each party on the issues
that are now the subject of this appeal. We will first decide the
point on which the district court based its dismissal of the
complaint in favor of HUD, namely that Intervest was not entitled
to attorney’s fees because it was not the real party in interest.
Intervest argues that the district court failed to adhere to the
EAJA’s plain wording by requiring Intervest to prove that it was a
real party in interest. Such a requirement, Intervest asserts, is
5
inconsistent with both the plain language of the EAJA and this
court’s jurisprudence on this issue.
In this respect, HUD’s basic argument is that the real party
in interest test is consistent with Congress’s intent in passing
the EAJA; that is, Congress intended to subsidize litigation
initiated by small businesses and not to award fees to ineligible
parties who actually finance and control the litigation. HUD also
argues that the real party in interest test is not inconsistent
with our jurisprudence.
Because we conclude that the district court erred in adopting
the real party in interest test, and accordingly reverse and
remand, we must proceed to the second issue. HUD argues that the
mere fact that the district court found HUD’s action to be
arbitrary and capricious does not mean, ipso facto, that HUD’s
litigation position was not substantially justified. HUD further
argues that precedent requires a more thorough analysis. On the
other hand, Intervest asks us to affirm the district court’s ruling
on the “substantial justification” question because the findings of
fact underlying that ruling support a conclusion that the decision
to debar Intervest and Nail was in fact not substantially
justified. We hold that the district court also erred on the
substantial justification question and direct the court to
reconsider on remand.
III
A
6
We first address whether the district court erred in adopting
the real party in interest test to determine whether Intervest was
entitled to an award of attorney’s fees and costs under the EAJA.
Whether the district court erred in adopting the real party in
interest doctrine is a question of law subject to de novo review.
Texas Food Indus. Ass’n v. United States Dep’t of Agric., 81 F.3d
578, 580 (5th Cir. 1996).
A party eligible to receive attorney’s fees and costs under
the EAJA is: “(i) an individual whose net worth did not exceed
$2,000,000 at the time the civil action was filed, or (ii) any
owner of an unincorporated business, or any partnership,
corporation, association, unit of local government, or
organization, the net worth of which did not exceed $7,000,000 at
the time the civil action was filed, and which had not more than
500 employees at the time the civil action was filed.” 28 U.S.C.
§ 2412(d)(2)(B). Intervest falls within the EAJA’s definition of
“party.” It is a corporation whose net worth did not exceed
$7,000,000 and it employed fewer than 500 people at the time the
civil action was filed.
The district court nonetheless held that Intervest was not
entitled to an award of attorney’s fees and costs under the EAJA
because Nail -- not Intervest -- was the real party in interest in
the civil action. Because Nail did not qualify as an eligible
party under the EAJA, the court determined that no award of
attorney’s fees and costs should be granted to Intervest. To
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support this proposition, the district court applied the real party
in interest test, which the D.C. Circuit had adopted in Unification
Church v. Immigration & Naturalization Service, 762 F.2d 1077 (D.C.
Cir. 1985) (holding that before an eligible party can recover fees
and costs under the EAJA, the court must decide who the real party
in interest is and decide whether that party is eligible for such
an award).
In its application of the real party in interest doctrine to
this case, the district court noted that Nail is the president and
sole stockholder of Intervest and that the same attorneys
represented both Nail and Intervest. In addition, Nail wrote that
“[m]y personal resources have been exhausted due to legal fees my
company has incurred that resulted from a lawsuit filed by the
Government.” The district court interpreted that statement to mean
that Nail regarded his personal funds and those of Intervest as
identical. Finally, the court noted that because Intervest is a
subchapter-S corporation, all of the corporation’s income passes
through to its shareholders for tax purposes. On the basis of
these facts, the district court determined that Nail was the real
party in interest and it denied Intervest’s application for
attorney’s fees and costs because Nail was ineligible for such an
award under 28 U.S.C. § 2412(d)(2)(B)(i).
The D.C. Circuit adopted the real party in interest test in
attempting “to divine the intent of Congress.” Unification Church,
762 F.2d at 1089. The Unification Church court concluded that in
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passing the EAJA, Congress intended to ease the burden on small
businesses engaged in litigation with the federal government
without subsidizing the acquisition of legal services by entities
who are readily capable of affording those legal services. Id. at
1082. “To implement this latter congressional intent in the case
at hand, invocation of the real-party-in-interest doctrine is
proper.” Id. In that case, the court determined that the Church
-- not the employees who filed the claim -- was the real party in
interest because the Church had consented to pay its employees’
attorney’s fees. Id. at 1082-83.
Yet, as noted above, Congress has precisely defined the term
“party.” Although we do not say that the D.C. Circuit was
incorrect in its assessment of Congress’s intent, its resort to the
legislative history for the inclusion of a non-statutory
requirement for EAJA eligibility was unnecessary. There is no
ambiguity in the statutory language that would warrant looking
beyond the plain language of the statute for additional
understanding of Congress’s intent. Zapata Hanie Corp. v. Arthur,
926 F.2d 484, 487 (5th Cir. 1991) (“Where a statute is unambiguous
and there is no room for interpretation or construction of [a]
provision, we cannot circumvent its clear words.”).
It is certainly true that Congress was concerned that large
entities capable of purchasing legal services might inappropriately
recover fees and costs under the EAJA. That concern is precisely
why it included in the EAJA the net-worth and employee-number
9
limitations. If Congress had wanted to incorporate a real party in
interest test into the EAJA’s definition of a “party,” then it
could have done so. Nowhere does Congress limit the EAJA’s
application to corporations whose shareholders individually are
eligible for an award of fees and costs under the EAJA.
We addressed a similar issue in Texas Food, in which the
United States Department of Agriculture contended that the EAJA
eligibility of the National American Wholesale Grocers’ Association
depended not only on the association’s net worth and number of
employees but also on the assets and size of the association’s
members. 81 F.3d at 579. In rejecting that proposition, we noted
that we “must presume that a legislature says in a statute what it
means and means in a statute what it says there.” Id. at 581-82
(quoting U.S. v. Meeks, 69 F.3d 742, 744 (5th Cir. 1995)). HUD and
the district court attempt to narrow the Texas Food holding to
apply only to associations and their members. Yet it is clear to
us that Texas Food stands for the proposition that this court will
not add requirements beyond the statute for qualification as EAJA
eligible parties. We therefore conclude that the district court’s
adoption of the real party in interest test was error. This result
requires us to now address the second issue in this appeal, which
is presented by HUD.
B
The district court’s determination on the issue of substantial
justification under the EAJA is reviewed for an abuse of
10
discretion. Pierce v. Underwood, 487 U.S. 552, 558-59 (1988).
Underlying conclusions of law are reviewed de novo. Texas Food
Industry Ass’n v. United States Dept. of Agriculture, 81 F.3d 578,
580 (5th Cir. 1996). We review findings of fact for clear error.
Davidson v. Veneman, 317 F.3d 503, 505 (5th Cir. 2003).
The EAJA allows for an award of attorney’s fees and other
expenses to an eligible party “unless the court finds that the
position of the United States was substantially justified or that
special circumstances make an award unjust.” 28 U.S.C. §
2412(d)(1)(A). The district court ruled that “the government’s
position was not substantially justified” because “this Court has
already found that the decision by HUD to debar Plaintiffs was
arbitrary and capricious.” The district court erred in basing its
conclusion solely on this fact. Griffon v. United States Dept. of
Health and Human Services, 832 F.2d 51, 52 (5th Cir. 1987) (holding
that “[m]erely because the government’s underlying action was held
legally invalid as being ‘arbitrary and capricious’ does not
necessarily mean that the government acted without substantial
justification for purposes of the [EAJA]...”).
For a government decision to be considered substantially
justified under the EAJA, the court must find that a “genuine
dispute” exists in the case. Pierce, 487 U.S. at 565. The
government’s decision must be “justified to a degree that could
satisfy a reasonable person.” Id. Moreover, the EAJA requires the
district court to conduct its substantial justification analysis
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“on the basis of the record (including the record with respect to
the action or failure to act by the agency upon which the civil
action is based) which is made in the civil action for which fees
and other expenses are sought.” 28 U.S.C. § 2412(d)(1)(B). The
district court did not conduct the required analysis, and
consequently, the threshold question of whether HUD’s debarment
decision was substantially justified is not resolved. We will
therefore remand this issue to the district court for analysis of
whether HUD’s decision to debar Nail and Intervest was
substantially justified and to make such findings of fact and
conclusions as may be necessary to support its substantial
justification holding.
IV
In sum, we hold that the district court erred in applying the
real party in interest test because that test contradicts the plain
language of the EAJA. Accordingly, we REVERSE that portion of the
district court’s judgment and REMAND for the district court to
consider the claims in this case based upon the statutory language.
We also hold that the district court erred in concluding that a
previous ruling that a government action was arbitrary and
capricious means, ipso facto, that the action was not substantially
justified. Consistent with this ruling, we VACATE that portion of
the district court’s judgment and REMAND for the district court to
consider further whether HUD was substantially justified in
debarring Nail and Intervest. If it determines that HUD was not
12
substantially justified in its actions, it then must determine
whether there are any special circumstances to deny Intervest
attorney’s fees based on the statutory language,2 and if not, it
must decide the amount of those fees, taking into special
consideration the fact that the same attorneys represented and
performed services for both Nail and Intervest in the debarment
proceeding.
REVERSED in part, VACATED in part, and REMANDED.
2
If, on remand, the district court determines that HUD’s
debarment decision was not substantially justified, it may still
consider whether there are any special circumstances in this case
that render an award unjust. 28 U.S.C. § 2412(d)(1)(A).
Consistent with our rejection of the real party in interest
doctrine, these special circumstances must amount to more than the
fact that Nail is the owner, sole shareholder, and Chief Executive
Officer of Intervest.
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