Julie Su v. Brian Bowers

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JULIE A. SU, Acting Secretary of No. 22-15378

Labor, United States Department of

Labor, D.C. No.

1:18-cv-00155-

Plaintiff-Appellee, SOM-WRP

v.

OPINION

BRIAN J. BOWERS, an individual;

DEXTER C. KUBOTA, an individual;

BOWERS + KUBOTA

CONSULTING, INC., a corporation;

BOWERS + KUBOTA

CONSULTING, INC. EMPLOYEE

STOCK OWNERSHIP PLAN,

Defendants-Appellants.

Appeal from the United States District Court

for the District of Hawaii

Susan O. Mollway, District Judge, Presiding

Argued and Submitted February 15, 2023

Honolulu, Hawaii

Filed October 25, 2023

2 SU V. BOWERS

Before: Carlos T. Bea, Daniel P. Collins, and Kenneth K.

Lee, Circuit Judges.

Opinion by Judge Lee;

Partial Concurrence and Partial Dissent by Judge Collins

SUMMARY *

Equal Access to Justice Act

The panel affirmed the district court’s denial of

attorneys’ fees and nontaxable costs under the Equal Access

to Justice Act (“EAJA”), and remanded the district court’s

award of taxable costs.

The U.S. Department of Labor brought the underlying

lawsuit under the Employee Retirement Income Security

Act, alleging that Appellants Brian Bowers and Dexter

Kubota sold their company to an employee stock ownership

plan (ESOP) at an allegedly inflated value. The

government’s case hinged on a single valuation expert, who

opined that the plan overpaid for that company. The district

court rejected the opinion, and the government lost a bench

trial. The district court denied Appellants’ request for

attorneys’ fees and nontaxable costs under EAJA, finding

that the government’s litigation position was “substantially

justified” and that it did not act in bad faith,

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

SU V. BOWERS 3

The panel held that the district court did not abuse its

discretion in concluding that the government’s position at

trial was substantially justified, and in denying attorneys’

fees and nontaxable costs under EAJA. The panel noted that

the government could not rely on red flags alone, such as the

“suspicious” circumstances of the ESOP transaction, to

defend its litigation position as “substantially justified.” The

government, however, did not know heading to trial that the

district court would reject the expert’s entire opinion as

unreliable. The panel further held that it was constrained by

the deferential standard of review, and it could not say that

the district court abused its discretion in finding that the

government’s position was substantially justified at the time

of trial. Given the panel’s holding that the government’s

position was substantially justified, the district court did not

clearly err in finding that the government did not litigate in

bad faith.

The panel held that the district court abused its discretion

in reducing the award of taxable costs because it relied on a

clearly erroneous finding of fact in reducing the magistrate

judge’s recommended award of taxable costs.

Judge Collins concurred with the majority’s decision to

vacate the district court’s order reducing the award of

taxable costs, and dissented from the majority’s decision to

affirm the denial of EAJA attorneys’ fees. He would reverse

the district court’s determination that the government’s

position in this case was substantially justified, and would

remand for the district court to consider the government’s

remaining argument that none of the Appellants satisfied the

“net worth” requirements of EAJA.

4 SU V. BOWERS

COUNSEL

David R. Johanson, I (argued), Hawkins Parnell & Young

LLP, Napa, California; Douglas A. Rubel, Hawkins Parnell

& Young LLP, Cary, North Carolina; William M. Harstad,

Carlsmith Ball LLP, Honolulu, Hawaii; Scott I. Batterman,

Clay Chapman Iwamura Pulice & Nervell, Honolulu,

Hawaii; for Defendants-Appellants.

Christine D. Han (argued), Attorney, Office of the Solicitor;

Sarah M. Karchunas, Attorney, Plan Benefits Security

Division; Jeffrey M. Hahn, Counsel for Appellate and

Special Litigation; G. William Scott, Associate Solicitor for

Plan Benefits Security; Seema Nanda, Solicitor of Labor;

United States Department of Labor, Washington, D.C.; Jing

Acosta and Elisabeth Nolte, Trial Attorneys, United States

Department of Labor, Chicago, Illinois; for Plaintiff-

Appellee.

Richard J. Pearl, Faegre Drinker Biddle & Reath LLP,

Chicago, Illinois; Mark D. Taticchi, Faegre Drinker Biddle

& Reath LLP, Philadelphia, Pennsylvania; for Amicus

Curiae The ESOP Association.

SU V. BOWERS 5

OPINION

LEE, Circuit Judge:

Congress enacted the Equal Access to Justice Act

(EAJA) to curb abusive and costly lawsuits involving the

federal government. 28 U.S.C. § 2412. The EAJA thus

allows a prevailing party to seek attorneys’ fees and costs

from a federal agency if the agency’s litigation position was

not “substantially justified.”

The U.S. Department of Labor’s Employee Retirement

Income Security Act (ERISA) lawsuit here was time-

consuming and expensive for Appellants Brian Bowers and

Dexter Kubota, who sold their company, Bowers + Kubota

Consulting, Inc. (“B+K”), to an employee stock ownership

plan (ESOP) at an allegedly inflated value. The

government’s case was also shoddy: It ultimately hinged on

a single valuation expert, who opined that the plan overpaid

for the company. The expert’s errors led the district court to

reject his opinion, and the government lost after a five-day

bench trial. The district court, however, determined that the

government’s litigation position was “substantially

justified” and denied Bowers and Kubota’s request for

attorneys’ fees and costs.

We hold that the district court did not abuse its discretion

in denying attorneys’ fees. In hindsight, the Department of

Labor’s case had many flaws. But the district court did not

err in concluding that the government was “substantially

justified” in its litigation position when it went to trial. The

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.

6 SU V. BOWERS

We, however, remand on the award of costs because the

district court based its denial of costs in part on a clearly

erroneous factual finding.

BACKGROUND

I. The Secretary of Labor Brings an Unsuccessful

ERISA Action Against Bowers, Kubota, and B+K.

To understand the district court’s decision under the

EAJA, we must first take a brief look at the merits of the

Department of Labor’s ERISA lawsuit. For the most part,

we need not delve into the minutiae of the case. But it is

useful to understand the basic nature of the ESOP

transaction, why the government sued, and—most

importantly—why the government lost.

A. Bowers and Kubota sell B+K Consulting to an

ESOP.

Bowers and Kubota owned all the stock in B+K, a

construction management, architecture, and engineering

design firm based in Hawaii. In 2008, Bowers and Kubota

began exploring options for selling the company. After

some haggling with a potential third-party acquirer, Bowers

and Kubota decided to sell B+K to an ESOP. As suggested

by its name, an ESOP is an employee benefit plan that gives

employees an ownership stake in their company. 26 U.S.C.

§§ 401(a), 4975(e)(7). An ESOP has a trustee who owes

fiduciary responsibility to the plan’s participants and

beneficiaries. 29 U.S.C. §§ 1104, 1106(a)(1)(A), 1108(e),

1102(18).

In the fall of 2012, B+K retained Libra Valuation

Advisors (LVA) to prepare a fair market valuation for the

company. On December 3, 2012, B+K appointed a trustee

to the ESOP.

SU V. BOWERS 7

From there, the deal moved quickly. On December 7,

LVA changed its engagement letter to state that it was

working for the ESOP trustee rather than B+K. Negotiations

over the sale began on December 10. On December 11, LVA

valued B+K at between $37,090,000 and $41,620,000. And

by the end of that day, the ESOP trustee agreed that the

ESOP would buy B+K from Bowers and Kubota for

$40 million. Shortly after the agreement, LVA submitted its

final report, which concluded that B+K’s fair market value

was $40,150,000. With LVA’s advice that the $40 million

price was fair, the deal closed on December 14—the ESOP

trustee having billed only 30.1 hours of work.

B. The Department of Labor Sues Bowers, Kubota,

and B+K Under ERISA.

Two years after the B+K sale, the transaction came under

government scrutiny when a drop in the company’s share

price aroused the Department of Labor’s suspicion that B+K

was sold to the ESOP for more than its fair market value.

The government conducted a multiyear investigation,

culminating in a complaint filed against Appellants. The

complaint alleged that Bowers and Kubota breached their

fiduciary duties and engaged in self-dealing by inducing the

ESOP to pay above the fair market value for the shares of

B+K in violation of ERISA, 29 U.S.C. §§ 1001 et seq.

After surviving a motion to dismiss and a summary

judgment motion, the government’s case proceeded to trial.

The government emphasized the circumstances of the ESOP

transaction, questioning LVA’s independence as well as the

ESOP trustee’s diligence. But when the dust settled on the

government’s case, the only question that mattered was

whether B+K was sold for more than its fair market value.

8 SU V. BOWERS

To support that the ESOP overpaid for B+K, the

government depended on its valuation expert, Steven

Sherman. Sherman opined that LVA significantly

overvalued B+K by basing its findings on an unsupportable

projection of the company’s 2012 Earnings Before Interest,

Taxes, Depreciation, and Amortization (EBITDA). LVA

provided a 2012 EBITDA estimate of $9.2 million. In

contrast, Sherman—arguing that LVA’s estimate far

exceeded B+K’s past performance and the earnings achieved

by industry peers—estimated $4.8 million.

To reconcile this gaping difference, Sherman flagged

that LVA’s forecast projected lower subconsultant expenses

than B+K historically averaged, which Sherman argued

would have inflated LVA’s EBITDA estimate and

ultimately its valuation. Sherman concluded that by

adjusting these fees to align with historical averages, one

could produce a 2012 EBITDA that better matched B+K’s

past performance. As it would turn out, however, Sherman

was wrong because these subconsultant fees were not

expenses on B+K’s profit and loss statement but costs passed

through to the company’s clients. On top of his EBITDA

adjustments, Sherman further reduced LVA’s valuation by

applying a “limited control” discount, which he argued

would account for his observation that Bowers and Kubota

controlled B+K after the sale, even though the ESOP had

complete ownership of the company. Sherman concluded

that B+K had a fair market value of $26.9 million at the time

of the ESOP transaction.

After a five-day bench trial, Appellants prevailed. The

district court rejected Sherman’s expert report as unreliable,

finding that several errors—his revised EBITDA estimate,

his treatment of subconsultant fees, and his limited-control

discount analysis—caused him to “significantly and

SU V. BOWERS 9

unreasonably undervalue[]” B+K. Sherman erred in

deducting subconsultant fees because he mistakenly treated

them as B+K expenses, not as pass-through costs. His

limited-control discount analysis was erroneous because it

relied on post-sale facts that should not have been

incorporated into the pre-sale valuation. And he faltered in

his EBITDA estimate by glossing over B+K’s upward-

trending earnings and its backlog of contracts. The district

court added that these issues might have been avoided if

Sherman or the government’s attorneys had interviewed

B+K management about the company’s finances.

Without a reliable expert to show that B+K was sold for

more than its fair market value, the government’s case

crumbled.

II. The District Court Grants in Part and Denies in Part

Appellants’ Bill of Costs and Motion for Attorneys’

Fees and Nontaxable Costs.

After the trial, Appellants filed a bill of costs, seeking

reimbursement from the government for the taxable costs

incurred in the case. 28 U.S.C. § 2412(a)(1). A magistrate

judge recommended taxable costs of $72,962.95. The

district court adopted this recommendation in part,

modifying it to $41,810.46 based on its finding that certain

depositions taken by Appellants “were unnecessary and

unreasonably increased the cost of this litigation.”

Appellants also sought attorneys’ fees and nontaxable

costs under the EAJA. The magistrate judge recommended

denying the request, finding that the government’s position

was substantially justified and that it did not act in bad faith.

The magistrate judge concluded that the government

reasonably relied on Sherman’s expert opinion, despite its

flaws, when proceeding to trial. The district court adopted

10 SU V. BOWERS

the magistrate judge’s findings and conclusions. Appellants

then timely appealed.

ANALYSIS

Congress enacted the EAJA to “eliminate financial

disincentives for those who would defend against unjustified

governmental action and thereby to deter the unreasonable

exercise of Government authority.” Ardestani v. INS, 502

U.S. 129, 138 (1991). The EAJA partially waives the United

States’ sovereign immunity and allows prevailing parties to

seek attorneys’ fees and nontaxable costs if (a) the

government’s position was not “substantially justified” or

(b) the government acted in bad faith. 28 U.S.C. § 2412(b),

(d)(1)(A), (d)(2)(A). The EAJA also empowers a court to

award taxable costs. 28 U.S.C. § 2412(a). We affirm the

district court’s denial of fees, but we remand its award of

costs.

I. The District Court Did Not Abuse Its Discretion in

Finding the Government’s Position “Substantially

Justified” and Denying Attorneys’ Fees and

Nontaxable Costs under 28 U.S.C. § 2412(d).

Under the EAJA, a prevailing party can seek attorneys’

fees unless the government’s litigation position was

“substantially justified.” See Comm’r, INS v. Jean, 496 U.S.

154, 159, 165 (1990). For the government’s position to be

substantially justified, it “must have a ‘reasonable basis both

in law and fact.’” Meier v. Colvin, 727 F.3d 867, 870 (9th

Cir. 2013) (quoting Pierce v. Underwood, 487 U.S. 552, 565

(1988)). Of course, the government’s position need not be

correct, but it must be “justified to a degree that could satisfy

a reasonable person.” Underwood, 487 U.S. at 565–66 &

n.2.

SU V. BOWERS 11

Courts thus must avoid placing “too much weight on the

government’s ultimate loss” in hindsight, and instead assess

“the reasonableness of the government’s position at the time

of the litigation.” Gonzales v. Free Speech Coal., 408 F.3d

613, 620 (9th Cir. 2005). In deciding whether the

government’s position was substantially justified after we

already know the outcome, “it is not enough to repeat the

analysis of the merits decision, and add adjectives.” Taucher

v. Brown-Hruska, 396 F.3d 1168, 1175 (D.C. Cir. 2005)

(Roberts, J.). The central issue, then, is whether the

government’s position at trial was reasonable, despite its

ultimate failure to prove that position.

We review the district court’s fee determination under

the EAJA for an abuse of discretion. Underwood, 487 U.S.

at 559–60. “A district court abuses its discretion when . . .

its application of the correct legal rule is illogical,

implausible or without support in inferences that may be

drawn from the facts in the record,” Meier, 727 F.3d at 869–

70 (citing United States v. Hinkson, 585 F.3d 1247, 1261–62

(9th Cir. 2009) (en banc)), such that we are left with a

“definite and firm conviction” that the district court’s

conclusion was a mistake, Hinkson, 585 F.3d at 1262.

A. The Government Cannot Rely on Red Flags Alone

to Defend its Litigation Position as “Substantially

Justified.”

To start, the government makes much hay about the

“suspicious” circumstances of the ESOP transaction. It

points out, among other things, that the plan used the same

valuation advisor (LVA) that B+K had previously hired; that

the ESOP trustee billed only 30 hours; and that the deal was

completed at breakneck speed and landed on the same price

that Bowers and Kubota had wanted when they started the

12 SU V. BOWERS

process. Hearkening back to the adage “where there is

smoke, there must be fire,” the government implies that its

litigation position was “substantially justified.”

While these red flags can justify the investigation, they

alone cannot be the basis for proceeding to trial. The

government’s case here depended on its claim that the ESOP

improperly relied on LVA’s opinion and paid well above the

fair market value of the company. Put another way, the red

flags were a red herring if the plan ultimately paid fair

market value for the company. That means the government

must have provided some evidence that the ESOP sale price

was inflated. And here, the government relied only on its

expert’s valuation opinion. We thus must review whether

the district court abused its discretion in finding that the

government reasonably relied on its expert’s valuation

opinion, despite its flaws, as the parties proceeded to trial.

B. The District Court Did Not Abuse Its Discretion in

Finding that the Government was Substantially

Justified in Relying on Sherman’s Opinion at Trial.

The government’s valuation expert, Steven Sherman,

asserted that the $40 million valuation offered by LVA,

B+K’s advisor, was inflated because it had relied on a

dubious $9.2 million projection for the company’s 2012

EBITDA. In 2011, the company’s EBITDA was only

$2.6 million. Sherman cast doubt on LVA’s projection of a

sudden spike in EBITDA, given the company’s historical

performance and the results of comparable companies in the

industry. Sherman concluded that $4.8 million would have

been a more accurate projection for the 2012 EBITDA, and

he downgraded the company’s value accordingly.

Sherman believed that B+K’s subconsultant fees

possibly contributed to the inflated 2012 EBITDA

SU V. BOWERS 13

projection. So he deducted those expenses in preparing his

valuation of the company. But Sherman was wrong. He

conceded at trial that he had mistakenly considered the fees

as company expenses when in fact they were passed through

to B+K’s clients. Put another way, the subconsultant fees

could not have affected the 2012 EBITDA projection.

The government either knew or should have known

about this error before trial because Appellants’ experts

pointed out this mistake during discovery. Indeed, this error

also would have been apparent had Sherman interviewed

B+K management in accordance with the Uniform

Standards of Professional Appraisal Practice. The

government thus was not substantially justified in relying on

this aspect of its expert’s analysis.

But this error, as plain as it was, did not necessarily

undermine Sherman’s big-picture EBITDA analysis—and

the government’s position—as the parties headed to trial.

Sherman’s main objection to LVA’s valuation of the

company was that “the profitability of this company, which

had historically been two to five or $6 million EBITDA, was

not going to turn on a dime and go to nine or $10 million.”

He was stumped by how LVA could justify such a massive

surge in expected profitability in such a short time in a

competitive environment. One reason for this

overestimate—he thought—could have been LVA’s

understated forecast of B+K’s subcontract expenses; other

candidates might have been LVA’s failure to adjust for

additional wages. Whatever the cause, Sherman stood firm

in his conviction that B+K was not as profitable as LVA

predicted. As he testified at trial, “the adjustment to

subcontract expenses was more illustrative than anything

14 SU V. BOWERS

else. . . . I looked at the historical EBITDA . . . [a]nd there

was a radical change.” 1

Ultimately, the district court rejected Sherman’s

EBITDA analysis and his entire opinion. It found that

Sherman overlooked that B+K’s earnings trended upwards

and that the company had a backlog of contracts. 2 The court

also noted that Sherman should have known that his

projection was too low because B+K had notched a 2012

EBITDA of $7.047 million by the time that he produced his

opinion.

But the government did not know heading to trial that the

district court would reject Sherman’s entire opinion, even if

it knew or should have known that Sherman had erred in

assessing the subconsultant fees. The government could

have rationally believed that LVA’s valuation analysis was

faulty, given that LVA predicted that profitability would

balloon in a matter of a few months with no compelling

explanation why. Indeed, the actual EBITDA in 2012 turned

1

Sherman’s application of a limited-control discount was also

problematic because it was based on post-transaction circumstances. But

this error does not necessarily suggest that the government’s position

was unreasonable. For one thing, the discount constituted only a small

part of Sherman’s overall analysis. What’s more, the EAJA does not

require the government’s position to be faultless to be substantially

justified under 28 U.S.C. § 2412(d). See Underwood, 487 U.S. at 565

(stating that “substantially justified” does not mean “‘justified to a high

degree,’ but rather . . . justified to a degree that could satisfy a reasonable

person”).

2

Sherman had plausible responses to the district court’s critiques of his

opinion. For example, Sherman recognized that the company had strong

revenue growth—indeed, his opinion incorporated B+K’s revenue

projections—but he contended that the company’s profits remained far

short of LVA’s projections.

SU V. BOWERS 15

out to be $7 million, far lower than LVA’s estimate of $9 or

$10 million (although much higher than Sherman predicted).

And the fact that the district court denied Appellants’ motion

in limine to exclude Sherman as an expert witness suggests

that the government did not know the court would later reject

Sherman’s opinion as unreliable.

In short, the government’s litigation position at the time

of trial was weak on evidence but perhaps not without a

reasonable basis. We recognize that this is a close call. We

also note that the EAJA is not a toothless tool when

combatting governmental overreach: the statute entitles

parties to seek fees from the government when its case is

based on incorrect legal positions or dubious evidence and

expert testimony. Indeed, had the district court awarded fees

here, it might not have been an abuse of discretion to do so.

But we are constrained by that same deferential standard of

review. And we cannot say that the district court abused its

discretion in finding that the government’s position was

substantially justified at the time of trial. 3

3

The dissent suggests that we are establishing a laxer standard for the

government to prevail in an EAJA case. Not so. Our decision is largely

based on our deferential standard of review and the unique facts of the

case. At the time of trial, the government appeared to have substantial

evidence for its case because its expert pinpointed the anomaly of

Appellants’ estimate that EBITDA would double in a short period of

time (it turned out that both the government and Appellants were

substantially off in their EBITDA projections). In the end, the

government’s case completely crumbled, but we cannot say that the

district court abused its discretion in finding the government’s position

to be substantially justified at the time of trial.

16 SU V. BOWERS

II. The District Court Did Not Abuse Its Discretion in

Denying Attorneys’ Fees and Nontaxable Costs

under 28 U.S.C. § 2412(b) Because the Government

Did Not Act in Bad Faith.

Appellants also appeal the district court’s denial of

attorneys’ fees under 28 U.S.C. § 2412(b). Section 2412(b)

allows a court to award attorneys’ fees where the

government acted in bad faith. Rodriguez v. United States,

542 F.3d 704, 709 (9th Cir. 2008) (quoting Chambers v.

NASCO, Inc., 501 U.S. 32, 45–46 (1991)). Here, the district

court found that the government did not act in bad faith. We

review that finding for clear error. Ibrahim v. DHS, 912 F.3d

1147, 1166 (9th Cir. 2019) (citing Cazares v. Barber, 959

F.2d 753, 754 (9th Cir. 1992)).

“Mere recklessness does not alone constitute bad faith;

rather, an award of attorney’s fees is justified when reckless

conduct is ‘combined with an additional factor such as

frivolousness, harassment, or an improper purpose.’”

Rodriguez, 542 F.3d at 709 (quoting Fink v. Gomez, 239

F.3d 989, 993–94 (9th Cir. 2001)). Naturally, this is a higher

burden than § 2412(d)’s requirement that the government’s

case be “substantially justified.” See Underwood, 487 U.S.

at 566 (“To be ‘substantially justified’ means, of course,

more than merely undeserving of sanctions for

frivolousness.”). Given our holding that the government was

substantially justified in its position, the district court did not

clearly err in finding that the government did not litigate in

bad faith.

III. The District Court Abused Its Discretion in Reducing

the Award of Taxable Costs.

Finally, we hold that the district court incorrectly

reduced the magistrate judge’s recommended award of

SU V. BOWERS 17

taxable cost by relying on a clearly erroneous finding of fact.

Hinkson, 585 F.3d at 1263; 28 U.S.C. § 2412(a)(1).

The parties agree that the district court mistakenly

believed that several depositions occurred after it had denied

Appellants’ motion for summary judgment and that the

depositions therefore “unreasonably increased the cost” of

litigation. In reality, the depositions were taken before that

judgment. Because the district court’s reduction of costs was

mainly based on that clear error, it abused its discretion. We

thus remand the issue of costs so that the district court may

reconsider its decision on the corrected record.

CONCLUSION

The EAJA deters the government from using its vast

resources and power to pursue abusive litigation against its

citizens. Appellants soundly defeated the government’s

flawed case against them. But whether the district court

abused its discretion in denying attorneys’ fees is a different

question. And under that deferential standard, we do not

have the “definite and firm conviction” that the district court

erred in finding that the government’s position was

substantially justified. Hinkson, 585 F.3d at 1263. We

AFFIRM the district court’s denial of attorneys’ fees and

nontaxable costs, and we REMAND the district court’s

award of taxable costs.

18 SU V. BOWERS

COLLINS, Circuit Judge, concurring in part and dissenting

in part:

I agree with the majority’s decision to vacate the district

court’s order reducing the cost award, and I therefore concur

in Part III of the court’s opinion. However, I dissent from

the majority’s decision to affirm the denial of attorney’s fees

in this case.

As a general rule, if a civil case brought by the

Government is unsupported by substantial evidence, then the

Government’s litigating position is not “substantially

justified” for purposes of determining the defendants’

eligibility for attorney’s fees under the Equal Access to

Justice Act (“EAJA”), 28 U.S.C. § 2412(d)(1)(A). Here, the

majority does not dispute that the Government’s case against

Defendants-Appellants was unsupported by substantial

evidence, yet the majority nonetheless upholds the district

court’s denial of attorney’s fees. The majority does so on

the ground that the Government reasonably failed to

recognize, in advance of trial, just how weak its case was.

See Opin. at 14–15. But this replaces the statutory standard

for when attorney’s fees may be denied (viz., when “the

position of the United States was substantially justified”)

with a standard that is much more forgiving to the

Government (viz., whether the United States reasonably

believed that its position was substantially justified).

Because the majority’s novel standard is inconsistent with

the statute and precedent and leads to the wrong outcome in

this case, I respectfully dissent.

I

The relevant provision of the EAJA states that, “[e]xcept

as otherwise specifically provided by statute, a court shall

SU V. BOWERS 19

award to a prevailing party other than the United States fees

and other expenses . . . incurred by that party in any civil

action (other than cases sounding in tort) . . . brought by or

against the United States in any court having jurisdiction of

that action, 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) (emphasis added). Under the EAJA, the

default rule is that attorney’s fees will be awarded if the

Government loses the case, unless the Government carries

its burden to show that its position in the litigation was

substantially justified or that, for other special reasons, an

award of fees would be unjust. Here, the district court denied

Defendants’ motion for attorney’s fees under § 2412(d)

solely on the ground that the Government’s position was

substantially justified, and so the central question before us

is whether the district court correctly so held.

In Pierce v. Underwood, 487 U.S. 552 (1988), the

Supreme Court construed the phrase “substantially justified”

in the EAJA by drawing upon the settled understanding of

the familiar, and similarly phrased, “substantial evidence”

standard that is applied in the administrative context. Id. at

564. Because that standard requires that an agency position

be supported with “‘such relevant evidence as a reasonable

mind might accept as adequate to support a conclusion,’” the

Court held that the EAJA standard likewise required that the

Government’s position be “justified to a degree that could

satisfy a reasonable person.” Id. at 564–65 (quoting

Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229

(1938)). That means, in other words, that the Government’s

position must have a “reasonable basis both in law and fact.”

Id. at 565 (citation omitted). We review “the position of the

United States” for substantial justification “as a whole,”

20 SU V. BOWERS

rather than by breaking the case down into “atomized line-

items.” Ibrahim v. U.S. Dep’t of Homeland Sec., 912 F.3d

1147, 1168–69 & n.16 (9th Cir. 2019) (en banc) (citations

omitted).

As we have recognized, Pierce’s explicit analogy

between the substantial evidence standard and the EAJA’s

“substantially justified” standard means that, except perhaps

in a “decidedly unusual case,” a judicial determination that

the Government’s case on the merits was “unsupported by

substantial evidence” will ordinarily mean that the

Government’s position was not “substantially justified” and

that fees should be awarded. Thangaraja v. Gonzales, 428

F.3d 870, 874 (9th Cir. 2005) (quoting Al-Harbi v. INS, 284

F.3d 1080, 1085 (9th Cir. 2002)); see also Meier v. Colvin,

727 F.3d 867, 872 (9th Cir. 2013).

Under these standards, this is an easy case. As I explain

in the next two sections, (1) the Government’s case against

Defendants was not supported by substantial evidence; and

(2) there is nothing about this matter that would make it the

sort of “decidedly unusual case” in which the Government’s

position can be said to have been “substantially justified”

despite the lack of substantial evidence.

II

The Government brought this suit against, inter alia,

Defendants-Appellants Brian Bowers and Dexter Kubota,

the founders of a design firm called Bowers + Kubota

Consulting (“B+K”), alleging multiple violations of the

Employment Retirement and Income Security Act

(“ERISA”), 29 U.S.C. § 1001 et seq. As the majority notes,

see Opin. at 7, the Government’s central theory was that

Bowers and Kubota had committed multiple violations of

ERISA in selling B+K to an Employee Stock Ownership

SU V. BOWERS 21

Plan (“ESOP”) for an allegedly inflated value of $40

million.1 This theory, however, was unsupported by

substantial evidence.

A

A review of the Government’s claims in this matter

confirms that the Government’s case rested dispositively on

the central premise that Bowers and Kubota had inflated the

value of B+K when selling it to an ESOP in December 2012.

First, the Government alleged that Bowers and Kubota—

who were allegedly “fiduciaries” of the ESOP within the

meaning of ERISA, see 29 U.S.C. § 1002(21)(A)(i)—had

engaged in a transaction prohibited by § 406(a)(1)(A) of

ERISA, 29 U.S.C. § 1106(a)(1)(A). That section prohibits

ESOP fiduciaries from causing the ESOP to engage in the

“sale or exchange, or leasing, of any property between the

plan and a party in interest.” 29 U.S.C. § 1106(a)(1)(A).

However, ERISA carves out certain transactions from that

prohibition, including an “acquisition, sale, or lease [that] is

for adequate consideration.” Id. § 1108(e)(1). For purposes

of that provision, “adequate consideration” means (as

relevant here) “the fair market value of the asset as

determined in good faith by the trustee or named fiduciary.”

Id. § 1002(18)(B). To establish the applicability of this

exception, it was Bowers and Kubota’s burden to prove, as

an affirmative defense to the Government’s § 406(a)(1)(A)

charge, that B+K’s $40 million sale price was not inflated.

Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996); see

also Perez v. Bruister, 823 F.3d 250, 262 (5th Cir. 2016);

1

An ESOP is “a type of pension plan that invests primarily in the stock

of the company that employs the plan participants.” Fifth Third Bancorp

v. Dudenhoeffer, 573 U.S. 409, 412 (2014).

22 SU V. BOWERS

Elmore v. Cone Mills Corp., 23 F.3d 855, 864 (4th Cir.

1994).

Second, the Government alleged that Bowers and

Kubota had engaged in a transaction prohibited by

§ 406(b)(1) and (b)(2) of ERISA, 29 U.S.C. § 1106(b)(1),

(2). Those subsections prohibit fiduciaries from “deal[ing]

with the assets of the plan in his own interest or for his own

account,” 29 U.S.C. § 1106(b)(1), and from “act[ing] in any

transaction involving the plan on behalf of a party (or

represent[ing] a party) whose interests are adverse to the

interests of the plan or the interests of its participants or

beneficiaries,” id. § 1106(b)(2). The district court construed

these allegations—i.e., that Bowers and Kubota were acting

in their “own interest,” and acting on behalf of a party

(themselves) “whose interests are adverse to the interests of

the [ESOP]”—as requiring the Government to make a

showing that the $40 million sale of B+K was “for more than

fair market value.” In other words, the district court

concluded that Bowers and Kubota would not be acting in

their “own interest,” id. § 1106(b)(1), or in the service of

interests “adverse to the interests of the [ESOP],” id.

§ 1106(b)(2), if they arranged the sale of B+K for a price that

fairly reflected the ESOP’s interests (i.e., for a price

reflecting fair market value). The Government has not

challenged the district court’s legal analysis of the elements

of this claim.

Third, the Government alleged fiduciary imprudence and

disloyalty by Bowers and Kubota, in violation of

§ 404(a)(1)(A), (B), and (D) of ERISA. This cause of action

rested on allegations that Bowers and Kubota had failed in

their duties as trustees by (1) “[c]ausing unreasonable,

inflated revenue projections” for B+K to be forwarded to a

firm (LVA) conducting an evaluation of the value of B+K;

SU V. BOWERS 23

(2) failing to adequately monitor the ESOP trustee

(Saakvitne) to ensure that “he acted in the best interests of

the [ESOP’s] Participants and Beneficiaries”; (3) relying on

a valuation of B+K, prepared by LVA, that “significantly

overvalued the shares of [B+K],” without ensuring that

reliance on LVA’s valuation report “was reasonably justified

under the circumstances”; (4) relying on another LVA-

created “Fairness Opinion,” which “indicated that the fair

market value of the Company as of that date was

$40,150,000,” without “making certain that reliance on the

Opinion was reasonably justified under the circumstances”;

and (5) “[c]ausing the ESOP to enter into the purchase of the

Company’s stock at a price in excess of fair market value

which was not solely in the interest of the Plan’s

participants.”

Three of these five allegations—allegations (3), (4), and

(5) above—rested explicitly on the Government’s claim that

B+K’s overall value was overstated. Allegation (1) also

rested indirectly on that valuation claim, because the

allegedly inflated 2012 revenue projections would cause a

loss to the ESOP only if they ultimately caused the company

to be sold for more than it was worth. Allegation (2) also

rested implicitly on the premise that the company was

overvalued, because the Government’s theory was that

Bowers and Kubota’s failure to monitor Saakvitne led to his

agreement to buy B+K for an inflated price, in violation of

his obligation to “act[] in the best interests of the [ESOP’s]

Participants and Beneficiaries.” 2

2

The Government also alleged that Bowers and Kubota were liable as

co-fiduciaries, that they engaged in knowing participation in trustee

Saakvitne’s fiduciary breaches, and that they orchestrated improper

indemnification agreements with the ESOP. The first two claims were

24 SU V. BOWERS

Accordingly, Bowers and Kubota’s liability in this case

ultimately hinged dispositively on whether they had inflated

the value of B+K when selling it to an ESOP in December

2012. Although the party with the burden of proof on that

issue shifted depending upon the claim, a finding that B+K

was worth more than $40 million would doom the

Government’s entire case.

B

As the district court found, the evidence of both sides at

trial showed that B+K was worth more than $40 million at

the time it was sold to the ESOP. Although the Government

sought to prove otherwise, its valuation methodology

contained several obvious errors that, once corrected,

confirmed that the company’s value exceeded $40 million.

Specifically, the Government at trial relied exclusively

upon a valuation expert named Sherman, who testified that

at the time of sale, B+K was in fact worth just $26.9 million,

and that Bowers and Kubota’s competing valuation report

was flawed. However, as the district court concluded,

Sherman made three significant errors that caused him to

“significantly and unreasonably undervalue[] the Company”

(emphasis added).

First, Sherman erroneously treated some $10.5 million in

“subconsultant fees”—which the company had in fact

passed on to clients—as if they were company expenses that

had to be “deducted in determining the value of the

entirely derivative of the Government’s other claims. The third claim

was not, strictly speaking, an operative substantive claim: the district

court held that, properly construed, the Government’s indemnification

claim sought no finding of liability against Bowers and Kubota on the

merits, but sought merely to hold certain indemnification agreements

void in the event that liability was found on another ground.

SU V. BOWERS 25

Company.” As the district court concluded, “[t]his was a

notable error” that caused Sherman’s valuation of B+K to be

“correspondingly too low.”

Second, Sherman erroneously applied a nearly $3

million discount to the company’s value based on

circumstances occurring after the company’s sale. This was

a clear violation of the applicable appraisal standards.

Correcting just these two obvious errors in Sherman’s

analysis leads to a valuation of more than $40 million. That

is, had Sherman correctly omitted the $10.5 million in

subconsultant fees and the erroneous $3 million discount, his

calculated value of the company—applying his own

methodology—would have been $40.4 million.

Third, Sherman erroneously relied on the sale price

floated in a nonbinding indication of interest from a third-

party company, URS. URS had earlier raised the possibility

of purchasing B+K for $15 million, “plus or minus ‘cash and

debt on the Company’s balance sheet.’” The Government

claimed in its Proposed Post-Trial Findings of Fact and

Conclusions of Law that “Sherman appropriately considered

URS’s indication of interest as an objective, market-based

indicator of the value at which a willing seller would

purchase B+K.” This aspect of Sherman’s analysis was also

seriously wrong. As the district court observed, B+K had

approximately $14 million in “cash and working capital” on

hand—meaning that Sherman, and by extension the

Government, had “ignore[d] the actual ‘cash and debt on the

Company’s balance sheet’ that the URS indication of interest

expressly acknowledged should be considered.” Moreover,

the URS indication of interest was, in essence, an initial low-

ball negotiation position on the part of URS; it was not an

actual estimate of the company’s fair-market value.

26 SU V. BOWERS

Accordingly, the URS indication of interest on which

Sherman relied had “little relevance to the actual value of the

Company.”

In light of these errors, the district court found that

Sherman “significantly and unreasonably undervalued the

Company.” “Not only does this render his ultimate valuation

unreliable,” the district court concluded, “it also undermines

the usefulness of his critique of LVA’s valuation” (i.e., the

competing valuation relied upon by Bowers and Kubota).

Without substantial evidence on the Government’s part

that B+K was worth anything less than $40 million, and

faced with competing valuation evidence substantiating a

value of over $40 million, Bowers and Kubota prevailed on

the central issue at trial—viz., “that the Company’s shares

were worth at least what the Company’s ESOP paid for it”

(emphasis added). 3

Accordingly, it is established, for purposes of this

appeal, that the Government’s case on the merits was

unsupported by substantial evidence. That brings this case

within the general rule that there is no “substantial

justification under the EAJA” where the Government’s

position was unsupported by “reasonable, substantial and

3

Moreover, even with respect to the subsidiary issue of whether the 2012

revenue projections were inflated, see supra at 22–23, the district court

held that the Government’s claims were simply unsupported. As the

district court stated, Sherman inexplicably failed to take into account

several relevant considerations in estimating his proposed “corrected”

projections, thereby rendering his estimates “unreliable.”

SU V. BOWERS 27

probative evidence in the record.” Thangaraja, 428 F.3d at

874; see Al-Harbi, 284 F.3d at 1085. 4

III

The only question, then, is whether this is the “decidedly

unusual case” in which the Government’s position might be

said to be substantially justified despite a wholesale lack of

evidentiary support. Al-Harbi v. INS, 284 F.3d at 1085. It

manifestly is not.

We found Al-Harbi to be such an “unusual” case, but our

rationale for doing so has no applicability here. In Al-Harbi,

we “upheld the government’s central positions in th[e]

appeal,” but we nonetheless granted relief to the alien based

solely on an additional issue that had been “articulated only

relatively briefly in Al–Harbi’s presentation to this court.”

284 F.3d at 1085. “Under these unique circumstances,” we

held, “the government’s litigation position as a whole [was]

substantially justified, albeit not ultimately adequate to

sustain the agency’s decision.” Id. Nothing comparable is

presented in this case. Here, in contrast to Al-Harbi, the

Government lost on the central issue that was the focus of

the entire case, and it lost precisely because its position on

that loadbearing issue was wholly unsupported. There is no

sense, as in Al-Harbi, that it could be said that, despite its

substantial-evidence-based loss on the dispositive issues, the

Government’s position could still be thought to be

substantially justified as an overall matter.

4

Contrary to what the Government contends, this conclusion does not

rest on or lead to the view that, whenever the Government loses a case

on the merits, its position is not substantially justified under the EAJA.

Here, the Government did not merely lose the case; it suffered a

wholesale failure of proof on the central issue in the litigation that

rendered its position, as an objective matter, wholly unsupported.

28 SU V. BOWERS

The majority does not directly dispute that the

Government’s case was not supported by substantial

evidence, but it nonetheless holds that the Government’s

litigating position was substantially justified. According to

the majority, when the Government proceeded to trial, it “did

not know the court would later reject” its expert’s valuation.

See Opin. at 14–15. Until the district court did so, the

majority asserts, the Government could reasonably have

relied on that valuation “at the time of trial.” See Opin. at

15. This approach is contrary to the statute and the caselaw

construing it.

The district court’s merits decision here rested upon, and

was driven by, objective—indeed, incontestable—flaws in

the Government’s expert’s valuation of B+K. Given these

objective errors—which were inherent in the Government’s

case even before the district court pointed them out—the

majority is wrong in saying that the Government’s litigating

position was somehow reasonable up to the point that the

district court rejected it. The district court’s merits decision

simply recognized and enumerated the patent substantive

deficiencies that were built into the Government’s case all

along.

The majority suggests that, even though there was no

evidentiary support for the Government’s central claim

about the valuation of B+K, the Government’s position was

still substantially justified because, in light of the allegedly

inflated 2012 earnings estimates, the Government “could

have rationally believed that LVA’s valuation analysis was

faulty” as well. See Opin. at 14 (emphasis added). As an

initial matter, this effort to isolate one assertedly valid sliver

of the Government’s case provides no basis for concluding

that the Government’s position was substantially justified.

In applying that standard, we do not break down the

SU V. BOWERS 29

Government’s case into “atomized line-items” of this sort.

Ibrahim, 912 F.3d at 1168–69 & n.16 (citations omitted).

Rather, we ask whether the Government’s case was

“justified in substance or in the main,” Pierce, 487 U.S. at

565 (emphasis added), and for the reasons that I have

explained, it obviously was not. Moreover, the majority’s

effort to salvage some sliver of this shoddy case also fails on

its own terms. As noted earlier, the district court held that

the Government had failed to present “reliable” evidence to

support its critique of these earnings estimates, because its

expert’s analysis simply overlooked multiple relevant

factors. See supra note 3. The district court also faulted the

Government for failing to establish its broader claim that

these earnings estimates ultimately caused the company to

be sold for more than it was worth. In short, the

Government’s flawed reliance on these earnings estimates

only further confirms that its case was objectively and

seriously flawed.

More importantly, the majority’s rationale effectively

replaces the statutory standard for denying attorney’s fees—

viz., whether the Government’s position was “substantially

justified,” 28 U.S.C. § 2412(d)(1)(A)—with the much looser

standard of whether the Government “could have rationally

believed” that its position was substantially justified.

According to the majority, even though the Government’s

case was not supported by substantial evidence, it was still

“substantially justified” because “the government’s

litigation position at the time of trial was weak on evidence

but perhaps not without a reasonable basis.” Opin. at 15

(emphasis added). This is a gross dilution of the EAJA’s

standard, which does not allow the Government to defeat a

fee request based on speculative guesses about whether the

case was “perhaps” supported by substantial evidence. The

30 SU V. BOWERS

statute, as construed by the Supreme Court, requires that the

Government’s case objectively rest on “such relevant

evidence as a reasonable mind might accept as adequate to

support a conclusion.” Pierce, 487 U.S. at 564–65 (citation

omitted). That standard was not met here, and there are no

special circumstances that would suggest that this is the

“decidedly unusual case” in which the Government’s

position is substantially justified despite being unsupported

by substantial evidence. Al-Harbi v. INS, 284 F.3d at 1085.

* * *

Accordingly, I would reverse the district court’s

determination that the Government’s position in this case

was substantially justified, and I would remand for the

district court to consider the Government’s remaining

argument that none of the Appellants here satisfied the “net

worth” requirements of the EAJA. See 28 U.S.C.

§ 2412(d)(2)(B) (limiting the eligibility of individuals and

entities to claim attorney’s fees under EAJA to those whose

“net worth” is under specified amounts).

I respectfully dissent.