In Su v. Bowers, No. 22-15378, __F.4th__, 2023 WL 7009599 (9th Cir. Oct. 25, 2023) (Before: Bea, Collins, Lee) (concurrence and partial dissent by Collins), the Ninth Circuit considered whether the U.S. Department of Labor (“DOL”) was “substantially justified” in its litigation position against Appellants, the owners of Bowers + Kubota Consulting, Inc. (“B+K”), who the DOL alleged sold B+K to an employee stock ownership plan (ESOP) at an allegedly inflated value. The Appellants won after a five-day bench trial, but the district court denied them attorneys’ fees and costs under the Equal Access to Justice Act (EAJA). The Ninth Circuit held that the district court did not abuse its discretion in denying attorneys’ fees upon determining that the government’s position was substantially justified, where “[t]he government’s expert, despite his errors, arguably had a reasonable basis—at least at the time of trial—in questioning whether the company’s profits could surge by millions of dollars in just months.” However, the court found that the district court denied Appellants costs based on clearly erroneous fact finding and remanded the case on that issue.
By way of background, Appellants Bowers and Kubota owned all the stock in B+K, a construction management, architecture, and engineering design firm. In 2008, Appellants began exploring options for selling the company, and then decided to sell B+K to an ESOP. In the fall of 2012, B+K retained Libra Valuation Advisors (“LVA”) to prepare a fair market valuation for the company and later appointed a trustee to the ESOP. LVA then changed its engagement letter to state it was working for the ESOP trustee rather than B+K. On December 11, 2012, LVA valued B+K at between $37,090,000 and $41,640,000, and later the same day, the ESOP trustee agreed to buy B+K for $40,000,000. Two years later, after a drop in the company’s share price, the DOL conducted a multiyear investigation against Appellants, culminating in a lawsuit against them for breach of their fiduciary duties and self-dealing in violation of ERISA.
The DOL’s case against Appellants depended on its valuation expert, Steven Sherman. Sherman opined that LVA significantly overvalued B+K. Based on his valuation, B+K had a fair market value of $26.9 million at the time of the ESOP transaction. The district court found Sherman’s report unreliable based on several errors and the DOL could not demonstrate that B+K was sold for an amount beyond fair market value. Though Appellants prevailed, the district court denied their motion for attorneys’ fees and costs. Appellants appealed.
The Ninth Circuit found that the district court did not abuse its discretion when it found the DOL’s position was “substantially justified” and denied attorneys’ fees and nontaxable costs under 28 U.S.C. § 2412(d). The issue is not whether the government ultimately lost, it’s whether its position at trial was reasonable. Though there were “red flags” around the ESOP transaction which justified an investigation, red flags alone cannot defend the DOL’s litigation position as substantially justified. That said, the court found that the district court did not abuse its discretion in finding that the DOL was substantially justified in relying on Sherman’s opinion at trial. Despite the error in his report, it did not undermine the big-picture analysis: “the profitability of this company, which had historically been two to five or $6 million [Earnings Before Interest, Taxes, Depreciation, and Amortization], was not going to turn on a dime and go to nine or $10 million.” The DOL’s litigation position at the time of trial was weak on evidence but not without a reasonable basis. The court noted that this was a close call and that it could not say the district court would have abused its discretion if it awarded fees.
Finally, the court found that the district court did not abuse its discretion in denying attorneys’ fees and nontaxable costs because there was no clear error in the district court’s finding that the DOL did not act in bad faith. But, with respect to taxable costs, the district court mistakenly reduced the magistrate judge’s award based on the mistaken belief that several depositions occurred after it denied Appellants’ motion for summary judgment. The court remanded the issue of costs.
*Please note that this blog is a summary of a reported legal decision and does not constitute legal advice. This blog has not been updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The case above was handled by other law firms, but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Roberts Disability Law, P.C. may be able to advise you so please contact us.
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