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.