Wednesday, July 11, 2007

Dunn & Black P.S. v. United States (9th Cir. - July 11, 2007)

When you're litigating against the United States, there are lots and lots of ways to lose. And even when you win, you may still lose. Like here.

Dunn & Black, a law firm in Washington State, represented Environmental Reclamation, Inc. ("ERI"). The Federal Highway Administration had terminated a contract with ERI, and Dunn & Black filed an action on behalf of ERI in the Court of Federal Claims seeking to recover over $1.7 million for alleged wrongful termination of the contract. Dunn & Black was initially "paid" hourly -- notice the quotation marks -- but when ERI wasn't actually paying these fees, Dunn & Black agreed to accept the first $140,000 of any recovery, which was the amount of fees already accrued, and 50% of any recovery above this amount.

Ultimately, the dispute was settled, and the Federal Highway Administration agreed to entry of judgment of $450,000 in favor of ERI. Sounds good, right? So Dunn & Black gets a fairly good payday -- $295,000 ($140,000 plus half of $450,000 minus $140,000) -- and ERI gets over $150,000 for its troubles. A good result for both, right?

Nope. Because what the U.S. (presumably) knows, and what ERI may well know, is that ERI already owes the IRS almost $600,000. So right after ERI obtains the $450,000 stipulated judgment, the IRS files an action against ERI, and seeks to collect against the $450,000. And ERI doesn't even bother to defend this suit, and a default judgment is entered.

So who gets screwed? Dunn & Black. Sure, the law firm files an action in which it alleges that it's entitled -- in equity, good conscience, and everything else under the sun -- to enforce its lien on the $450,000 judgment. After all, most of that money actually belongs to Dunn & Black, and they were the ones instrumental in creating it. But sorry, buddy. There's this little thing you may well have studied in law school that's spelled S-O-V-E-R-E-I-G-N I-M-M-U-N-I-T-Y. And, my friend, it's a biatch.

Dunn & Black loses in the district court on this basis and loses in the Ninth Circuit as well. So it's now out the entire $300,000 plus all the effort and expense in the district court and on appeal.

Not a good day for Dunn & Black. And an important reminder that when you're litigating on behalf of a client against the government, make sure your client doesn't owe any back taxes. Otherwise it's you that may well be the one getting hosed.