Subrogation
Page1
Dunn
& Black, P.S., Plaintiff v. The United States of America, and
Environmental Reclamation, Inc., an Idaho Corporation, and John Doe
Corporations 1 --10, Defendants. Fidelity and Deposit Company of
Maryland, a Maryland Corporation, and American Guaranty & Liability
Insurance Company, a New York Corporation, Intervenors.
U.S.
District Court, East.
Dist.
Wash.
; CV-04-0229-LRS,
February 25, 2005
.
[ Code
Sec. 6323]
Lien, validity and priority: Federal tax lien: Statutory setoff:
Attorney's lien: Equitable subrogation. --
A law firm
that had provided legal services to a construction company could not
recover on its attorney's lien on a judgment obtained for the company
against the government because its lien was inferior to the government's
statutory right to setoff. The government's setoff for unpaid taxes
exhausted the entire judgment fund. The government's statutory setoff
also deprived surety insurance companies of recovery on their claims
based on equitable subrogation and the relation back doctrine.
[ Code
Sec. 7402]
Jurisdiction: District court: Suit against
U.S.
: Illegally collected tax. --
A federal
district court had jurisdiction over a suit filed by a law firm for a
portion of a judgment fund to cover fees incurred in obtaining the
judgment against the government for a construction company. Federal
district courts have jurisdiction over suits against the government for
recovery of taxes alleged to have been illegally collected, as claimed
by the law firm.
ORDER
SUKO, District Judge: BEFORE THE COURT is Intervenors' Fidelity and
Deposit Company of Maryland and American Guaranty & Liability
Insurance Company's [Intervenors 1
] Motion for Declaratory Judgment, filed October 19, 2004 (Ct. Rec. 20);
Plaintiff Dunn and Black, P.S.'s [law firm] Motion for Summary Judgment
(Ct. Rec. 28), filed November 2, 2004; and Intervenors' Alternative
Motion For Stay of Plaintiff's Motion For Summary Judgment under Fed. R.
Civ. P. 56(f) (Ct. Rec. 40), filed
November 16, 2004
. These motions were heard with oral argument on
December 20, 2004
, at which time the court requested supplemental briefing on
jurisdiction and lien priority issues.
I. BACKGROUND FACTS AND SUMMARY OF THE PARTIES' ARGUMENTS
On June 20, 2004, plaintiff law firm, Dunn & Black, brought a
complaint in this court for declaratory judgment against the United
States and plaintiff's former client Environmental Reclamation, Inc.
[ERI] 2
, the non-participating defendant construction company. Plaintiff
requested this court to declare that its fees and costs of $361,037.20
are reasonable for the legal services rendered and that it was entitled
to assert an attorney's fee lien. First Amended Complaint, Prayer for
Relief. Further plaintiff requested that the court declare its
attorney's fee lien superior to all subsequent liens, claims, interest
in and to the judgment in the matter of Environmental Reclamation, Inc.
v. United States, case number 02-5C, before the U.S. Court of Federal
Claims [Court of Claims litigation]. Id. Alternatively, plaintiff
requested that this court declare that the
United States
' setoff constitutes unjust enrichment without fairly compensating Dunn
& Black for its services in creating the judgment fund, which
reasonable amount is $361,037.20. Id. Additionally, plaintiff requested
this court declare that the
United States
' setoff would be a violation of due process and plaintiff be paid
$361,037.20.
On
September 16, 2004
, the court allowed intervenors, judgment creditors of ERI, to
intervene. Ct. Rec. 19.
The matter before the court on cross motions for declaratory judgment
and summary judgment began as a contest of liens: an attorneys' lien for
services rendered in winning the disputed settlement/judgment fund 3
against the government versus liens by the intervenors versus IRS liens
on the judgment fund based on taxes owed by the law firm's former client
ERI. There are combinations of four distinct theories set forth by the
parties for this court to consider in its determination of the destiny
of the Judgment Fund: lien priority, equitable subrogation, equity, and
set-off.
On
July 24, 1997
, ERI executed an Indemnity Agreement agreeing to indemnify, save, and
hold harmless the intervenors as sureties for its execution or
procurement of bonds or undertakings on behalf of ERI as the principal.
Ferguson Aff., ¶4.
On
September 29, 1998
, ERI executed a second Indemnity Agreement agreeing to indemnify, save,
and hold harmless the intervenors as sureties for its execution or
procurement of bonds or undertakings on behalf of ERI as the principal.
Ferguson Aff., ¶5.
On
March 11, 1999
, ERI and Flying Eagle Corporation executed an Application for
Performance and Payment Bond and Indemnity Agreement with the
intervenors as the surety. Ferguson Aff., ¶8. Flying Eagle Corporation
(a dissolved corporation) and ERI jointly, severally, and
unconditionally agreed to indemnify and reimburse intervenors for said
Payment and Performance Bond and reimburse intervenors for and against
any loss in connection with said Bond.
Id.
On
July 8, 1999
, the Western Federal Lands Highway Division of the Federal Highway
Administration [FHWA] awarded a contract to ERI in the amount of
$3,499,464.50. Points Aff., Exh. D. The overall purpose of the contract
was to rebuild
Forest Development Road
#340 in the
Payette
National Forest
near
Warren
,
Idaho
.
Id.
The project involved rebuilding four bridges, pioneering a new alignment
for the road across a steep hillside, and other miscellaneous work.
Id.
ERI began work on
July 22, 1999
.
Id.
ERI's original completion date was
October 12, 2000
.
Id.
This date was later extended to
July 9, 2001
.
Id.
On
August 18, 1999
, ERI executed a third Indemnity Agreement agreeing to indemnify, save,
and hold harmless the intervenors as surety for its execution or
procurement of bonds or undertakings on behalf of ERI as the principal.
Ferguson Aff., ¶16.
In the year 2000, ERI retained the plaintiff law firm to advise it
regarding a road project called the Warren Profile Gap Road Project
[Warren Project] in South Central Idaho for FHWA. Plaintiffs' SOF 4
, ¶1. The government was refusing to grant extensions of time and
increases to ERI's contract amount.
Id.
At the time ERI engaged Dunn & Black to advise it on the Warren
Project, Dunn & Black had an ongoing client relationship with ERI
and was representing ERI on several other matters at an hourly rate.
Id.
, ¶2.
On
January 4, 2001
, the contracting officer for the government issued a termination for
default to ERI for the Warren Project. Points Aff., Exh. D. According to
Dunn & Black, the alleged wrongful termination of ERI by the
government caused tremendous financial stress on ERI, including ERI's
inability to pay taxes. Plaintiffs' SOF, ¶5.
On
January 3, 2002
, plaintiff filed an action in the United States Federal Court of Claims
on behalf of ERI to recover monetary damages for alleged wrongful
termination in the amount of $1,724,295.98 against the FHWA, a U.S.
Department of Transportation organization. [Court of Claims litigation].
Plaintiffs' SOF, ¶3, Aff. of M. Points, Exh. D. In the Court of Claims
litigation, ERI also requested that the termination for default be
converted into a termination for convenience.
Id.
The Court of Claims litigation presented complex issues involving
scheduling, accounting, rock geology and blasting. Plaintiffs' SOF, ¶3.
The
United States
asserted a claim for reprocurement costs in the amount of $948,168.82.
Id.
Dunn & Black engaged and paid experts to assist in proving ERI's
case and defending the government's claim.
Id.
On November 20, 2002, Dunn & Black amended its existing hourly fee
agreement it had with ERI, negotiated 5
and entered into a contingency fee agreement due to the high balance of
accounts receivable carried on the Warren Project and other matters.
Plaintiffs' SOF, ¶4. At this time, ERI was indebted to Dunn & Black
in the amount of $137,682.33 for past due legal services rendered on the
Warren
Project as well as on other matters.
Id.
The contingency fee agreement stated that Dunn & Black "shall
be entitled to the first $137,682.33 of any recovery from any claims
related to the project."
Id.
The agreement further stated that Dunn & Black shall be compensated
for its further services relating to the [
Warren
] Project in the amount of 50% of any remaining recovery and that ERI
was responsible for all litigation costs."
Id.
On November 14, 2003, Fidelity & Deposit Company of Maryland
[F&D], et al. (intervenors in this action) brought an action
against ERI in the United States District Court, District of Idaho, Civ.
No. 03-497-EJL, to recover for the amount paid out against the ERI bonds
and related collection expenses, including Bond # SUR-3596528 for the
Warren Project. F&D filed a motion for summary judgment for the
cumulative total of $931,860.84 claimed to be owed by ERI to F&D.
(Ct. Rec. 14, Civ. No. 03-497-EJL). ERI did not respond to the
dispositive motion. On
July 29, 2004
, Judge Edward Lodge entered judgment in favor of the surety companies
(intervenors in this action) against ERI for $931,860. (Ct. Rec. 22,
Civ. No. 03-497-EJL).
On
March 30, 2004
, a "Stipulation For Entry of Judgment" was entered in the
Court of Claims litigation. Points Aff., Exh. D. The stipulation was
entered to settle the claims asserted in ERI's complaint and to permit
entry of final judgment upon those claims without constituting an
admission of liability upon the part of the government.
Id.
ERI offered to settle all of its claims in exchange for payment by the
United States
of $450,000 (inclusive of interest, costs, expenses, and attorney fees)
and the government's agreement to convert the termination for default
into a termination for the convenience of the Government.
Id.
Subsequent to that stipulation, a $450,000 judgment was entered against
the United States on April 5, 2004 6
[hereinafter referred to as the judgment fund].
Id.
This $450,000 judgment fund lies at the vortex of this litigation.
According to Dunn & Black, ERI was required to pay the law firm
$361,037.20 from the judgment fund pursuant to the contingency fee
agreement. Plaintiff's SOF, ¶6.
The Internal Revenue Service [IRS], upon learning of the settlement,
asked the government to stop payment of the judgment so that the IRS
could offset certain federal tax liabilities of ERI against the
judgment.
On May 5, 2004, plaintiff was informed by a government attorney that the
IRS would be making claims to the settlement funds as an intended offset
of the entire amount of the judgment based on an unrelated federal tax
debt purportedly owed by ERI 7
. Plaintiffs' SOF, ¶7. In its answer to the plaintiff's complaint in
the instant action, the government (IRS) claims to be owed $987,839.84
as of
April 30, 2004
.
Answer, ¶20. 8
The Treasury Department is now withholding the judgment fund based on
the following tax liens that the IRS filed against ERI:
August 29, 2003
$3,969.36
November 19, $64,178.03
2003
March 29, 2004
$419,573.16
April 7, 2004
$412,148.54
$899,869.09
Points Affidavit, ¶4.
On
May 5, 2004
, plaintiff, after being informed that the IRS would be making claims,
served the government with a Notice of Attorney's Lien. Plaintiffs' SOF,
¶8. On
May 7, 2004
, ERI terminated its attorney-client relationship with plaintiff law
firm. ERI has not paid any of the amounts owing to plaintiff.
Id.
, ¶13.
On
June 3, 2004
, the government filed a civil action in the United States District
Court for the District of Idaho (Case No.
2:04
-cv-279-EJL) to reduce ERI's federal tax assessments to judgment. Ct.
Rec. 1, Case No. 2:04-cv-279-EJL. Originally the government demanded
$988,000 in unpaid tax assessments.
Id.
On
September 2, 2004
the government amended its complaint, demanding only $567,304.85 for
unpaid federal employment and unemployment tax liabilities plus interest
and other statutory additions. Ct. Rec. 6, Case No. 2:04-cv-279-EJL.
On
November 29, 2004
, the
Idaho
district court entered judgment in the amount of $609,079.96 (with
statutory additions and interest) upon the government's motion for
default judgment against ERI. Ct. Rec. 15, Case No. 2:04-cv-279-EJL;
Auchterlonie Decl., Exh. 1.
Intevenors state that ERI owes them $931,930.61 plus interest accruing
for all projects having the same principal (ERI) and the same
obligee/owner (the
United States
), and which amount has been reduced to a judgment rendered in civil
action, Civ. No. 03-497-EJL.
Bonds,
Bond Payments, Related Bond Expenses
ERI entered into the following bonds as principal in which the
intervenors are sureties:
SUR-2887088 Rio Pojaaque 11/20/98 $2,483,840.59
SUR-2887092 DEQ Worland 02/24/99 $1,779,219.53
SUR-2887095 DOR Worland
04/20/99
$71,168.78
SUR-3596528
Warren
Project
07/12/99
$1,272,785.80
SUR-3596532 Burgdorf Bridge
09/17/99
$29,150
SUR-3596536 Barrick Mine 06/01/00 $800,000 9 9 The
original amount of
this bond,
originally issued
January 25, 2000
was
$250,000, which was
ultimately changed
to $800,000 on June
1, 2000.
SUR-3631158 Barrick Goldstrike
06/27/00
$60,000
SUR-3631159 Goat Creek
07/13/00
$633,595
Ferguson Aff., ¶¶9-17 [hereinafter collectively referred to as
"Issued Bonds"].
Intervenors state they have made payments of $1,467,455.03 pursuant to
the terms of the Issued Bonds and have incurred expenses of not less
than $122,800 associated with the collection of all unpaid balances owed
to intervenors by ERI. Ferguson Aff., ¶¶18, 19.
Intervenors' payments of amounts owing to ERI's material suppliers and
subcontractors used and any expense payments made to legal and
engineering firms on various bond projects with ERI are as follows:
Bond Number Payee Date Paid Amount
SUR-2887088 J.R. Striping
2/21/01
$2,571.76
Valley Fence
2/15/01
$17,989
Montoya Constr.
6/22/01
$17,085.38
$37,646.31
SUR-2887092
SUR-2887095 Product Level
3/8/01
$95,534.55
Martin Constr.
4/10/01
$27,500
R.H. Grover
10/4/02
$212,079.74
Wyoming
State
11/6/02
$71,168.78
$406,283.07
Legal Expense various $71,374.69
Travel Expenses $2,045.68
$73,420.44
SUR-3596528 10 10
This bond is the
Warren Profile Gap
Project.
SUR-3596527 11 11 MSE-HKM, Inc.
2/15/01
$12,053.93
This bond was also
apparently issued in
connection with the
Warren Profile Gap
Project. However,
this bond was not
originally mentioned
in intervenors' Memo
in Support of
Declaratory Judgment
(Ct. Rec. 21, page
4).
Neff Rental
2/15/01
$57,611.55
Materials Testing
2/15/01
$26,687.00
Precision Sawdust
2/16/01
$1,100.00
Heavy Equipment
5/4/01
$12,826.13
Quattro Envir.
5/4/01
$5,616.62
ICM/Great Northern
5/15/01
$6,510.00
$122,405.23
Law Firm/Travel Various $97,876.08
SUR-3596532 Crane West
5/28/02
$10,125.00
SUR-3596536 Komatso Equip. ** $800,000
SUR-3631158 Familliam NW
2/9/01
$58,903.76
SUR-3631159 ICM/Great Northern
5/1/01
$21,420.00
SUR-3631157 12 12 ICM/Great Northern 5/1/01 $4,758.00
This bond, No. SUR
3631157, was
apparently issued
for ERI's Beartrack
Reclamation Project.
This bond was not
mentioned until the
Suppl. Ferguson
Affidavit was filed
in support of
intervenors'
Declaratory Judgment
motion. It is not
