200024022 [PFP#502557227]

Enacted November 26, 1997, the Hyde Amendment applies to any criminal case

instituted during fiscal year 1988 and in any fiscal year thereafter.

INTERNAL REVENUE SERVICE

Number: 200024022

Release Date: 6/16/2000

CC:EL:CT-119435-98 November 12, 1999

CC:EL:CT-109857-98

UILN: 9999.92-00

MEMORANDUM FOR ASSISTANT REGIONAL COUNSEL (CRIMINAL TAX)

FROM: Barry J. Finkelstein

Assistant Chief Counsel (Criminal Tax)

SUBJECT: Attorney’s Fees Awards Under the Hyde Amendment and

the Equal Access to Justice Act (EAJA)

Public Law 105-119, Title VI § 617, 111 Stat. 2440, 2519 (1997), commonly referred to

as the “Hyde Amendment,” enables a prevailing party in a criminal case to recoup

attorney’s fees and litigation expenses from the government in cases where the

government’s position was vexatious, frivolous, or in bad faith. The Hyde Amendment

was enacted as a criminal counterpart to the Equal Access to Justice Act (EAJA),

28 U.S.C. § 2412, which authorizes courts to award attorney’s fees and costs in most

civil cases. The Hyde Amendment applies to the conduct of the investigating agency,

as well as Department of Justice prosecutors. Thus, the Service may be wholly or

partially liable for payment of such awards based on the conduct of its personnel during

the underlying criminal investigation and/or referral of a case for prosecution. Attached

for your information is a discussion of the statutory framework governing such awards

and developing case law.

The Hyde Amendment incorporates the procedures and limitations contained in the

EAJA, but unlike the EAJA, it shifts the burden to the defendant to establish he was the

prevailing party and prove the government’s position was vexatious, frivolous, or in bad

faith. To assist courts in determining whether to make an award, the law permits courts

to receive evidence ex parte or in camera (including classified evidence or evidence

which may reveal confidential or undercover information or matters occurring before a

grand jury). If a prevailing party meets the burden of proof, the party will be entitled to

attorney’s fees and expenses unless the court finds special circumstances make such

an award unjust.

Since the enactment of the Hyde Amendment two years ago,

this law has spurred a

regular course of post trial motions for attorney fee awards in criminal cases. Case law

CC:EL:CT-109857-98/119435-98

under the Hyde Amendment is still in its infancy. A handful of published federal district

court opinions and more than a dozen unpublished ones have rendered some important

guidance in applying the law and construing its provisions. Generally, these courts

have based their decisions on a plain reading of the law. As discussed in the attached

document, some courts have found it necessary to read certain EAJA provisions

broadly to effectuate the intended purpose of the Hyde Amendment.

Attachment

28 U.S.C. §§ 2412(b) and (d).

AWARDS OF ATTORNEY’S FEES AND COSTS UNDER THE HYDE AMENDMENT

The Hyde Amendment was enacted as part of a 1997 appropriations bill and

is recorded as a statutory note to 18 U.S.C. § 3006A (relating to court appointed

counsel). The Hyde Amendment provides in its entirety as follows:

During fiscal year 1998 and in any fiscal year thereafter, the court, in any

criminal case (other than a case in which the defendant is represented by

assigned counsel paid for by the public) pending on or after the date of

the enactment of this Act, may award to a prevailing party, other than the

United States, a reasonable attorney's fee and other litigation expenses,

where the court finds that the position of the United States was vexatious,

frivolous, or in bad faith, unless the court finds that special circumstances

make such an award unjust. Such awards shall be granted pursuant to

the procedures and limitations (but not the burden of proof) provided for

an award under section 2412 of Title 28, United States Code. To

determine whether or not to award fees and costs under this section, the

court, for good cause shown, may receive evidence ex parte and in

camera (which shall include the submission of classified evidence or

evidence that reveals or might reveal the identity of an informant or

undercover agent or matters occurring before a grand jury) and evidence

or testimony so received shall be kept under seal. Fees and other

expenses awarded under this provision to a party shall be paid by the

agency over which the party prevails from any funds made available to the

agency by appropriation. No new appropriations shall be made as a

result of this provision.

I. Equal Access to Justice Act (EAJA) Overview

The Hyde Amendment, just like the EAJA, is a limited waiver of sovereign immunity

allowing awards of costs and attorney fees against the United States and its agencies.

Since the Hyde Amendment derives much of its statutory form and substance from the

EAJA, the following provides an overview of EAJA procedures and limitations made

applicable under the law.

There are two distinct methods for a district court to award attorney’s fees under the

EAJA.

Under subsection 2412(b), a district court may award attorney’s fees “to the

same extent that any other party would be liable under the common law or under the

terms of any statute which specifically provides for such an award.” Since the common

law allows awards of attorneys fees in only a few exceptional cases and most statutes

do not specifically provide for such awards, most EAJA litigation arises under the more

inclusive terms of subsection 2412(d) of the EAJA. Under subsection 2412(d)(1)(A), a

district court is mandated to award attorney’s fees to a prevailing party against the

government, unless the court finds the government was substantially justified in its legal

CC:EL:CT-109857-98/119435-98

28 U.S.C. § 2412(d)(1)(B).

See, Grivois v. Brown, 7 Vet App. 100 (Vet. App. 1994) (application filed on 31st day

after judgment became final was untimely). See also, Owens v. Brown, 10 Vet. App. 65

(Vet. App. 1997) (party may not correct a defective application after expiration of 30 day

filing period); Onstead v. Brown, 9 Vet. App. 189 (Vet. App.), reconsideration denied, 10

Vet. App. 1 (1996).

28 U.S.C. § 2412(d)(1)(B).

The EAJA does not provide a general definition of the term, but does provide a

definition of the term for specific application in eminent domain cases. 28 U.S.C.

§ 2412(d)(2)(H).

See, Dahlem v. Board of Education of Denver Pub. Sch., 901 F.2d 1508, 1512 (10th

Cir. 1990).

position or there are special circumstances that make an award unjust. However, as

discussed below, subsection 2412(d) erects certain threshold requirements and other

limitations not applicable under subsection 2412(b). Perhaps the most significant

consequence in proceeding under subsection 2412(d) is that the calculation of the

amount of the fees is tied to Criminal Justice Act (C.J.A.) rates (currently $125.00/hr.).

Whereas, a district court awarding fees under subsection 2412(b) may use prevailing

market rates which can greatly exceed the C.J.A. cap.

Courts addressing Hyde Amendment claims generally have followed the EAJA

“procedures and limitations” set forth under subsection 2412(d)(1)(B). Accordingly,

applications for an award of fees and expenses must be filed with the court within 30

days of final judgment.

Timely submission of an EAJA application is a jurisdictional

prerequisite to governmental liability for attorney fees.

A party seeking an award under subsection (d) must establish certain threshold criteria:

(1) show the party is a prevailing party; (2) show the party is eligible to receive an

award; (3) contain an itemized statement of the amount of the award sought; and

(4) allege the position of the United States was not substantially justified.

The term “prevailing party” is not well defined by the EAJA,

but is generally understood

as the party who wins the relief sought in the particular action.

A party need not obtain

total victory in the case to be entitled to fees as a prevailing party, but need only obtain

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Texas State Teacher’s Assciation v. Garland Independant School District, 489 U.S.

782, 792-93 (1989).

See generally, Goatcher v. Chater, 57 F.3d 980 (10th Cir. 1995); Cooper v. U.S. R.R.

Retirement Bd., 24 F.3d 1414 (C.A. D.C. 1994).

28 U.S.C. § 2412(d)(1)(B).

28 U.S.C. §§ 2412(d)(2)(B) and (G), respectively.

28 U.S.C. § 2412(d)(2)(G).

28 U.S.C. § 2412(d)(1)(B).

28 U.S.C. § 2412(d)(2)(A).

28 U.S.C. § 2412(d)(1)(B).

his desired result as to “any significant issue.”

Thus, most decisions to award attorney

fees under subsection (d) will be based on the nature of the case and the totality of the

circumstances.

Subsection (d) applications must establish the prevailing party’s eligibility to receive an

award.

Eligibility is based on a net worth limitation and the ripeness of the statutory

claim for attorney’s fees. These eligibility limitations are established within the statutory

definitions of the terms “party” and “final judgment.”

The term “party” is defined to

exclude individuals whose net worth at the time the action was filed exceeded $2

million, as well as the owners of an unincorporated business or any partnership,

corporation, association, or organization whose net worth at the time the action was

filed exceeded $7 million (charitable organizations are exempted from this limitation).

Thus, the application must show the prevailing party’s net worth was under the

applicable ceiling. Ripeness requires a showing that a final judgment has been

rendered in the case. The EAJA defines “final judgement” to mean “a judgment that is

final and not appealable, and includes an order of settlement.”

Subsection (d)

applications must provide an itemized statement of the amount of the award sought.

The fees and expenses which may be recouped in subsection (d) awards are

specifically enumerated.

Finally, subsection (d) applications must allege the position of the government was not

substantially justified.

Whether the position of the government was substantially

justified is determined on the basis of the record (including the record with respect to

the action or failure to act by the agency upon which the civil action is based) which is

CC:EL:CT-109857-98/119435-98

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

E.E.O.C. v. O & G Spring and Wire Forms Speciality Co., 38 F.3d 872 (Cir. 1994),

cert. denied, 513 U.S. 1198 (1995); Roanoke River Ass’n v. Hudson, 991 F.2d 132, 137

(4th Cir. 1993).

Willoughby v. Chater, 930 F. Supp. 1466 (D. Utah 1996); Burkins v. United States,

921 F. Supp. 704 (D. Colo. 1996); Swedish Hosp. Corp. v. Shalala, 845 F. Supp. 894

(D. D.C. 1993); Doria v. Brown, 8 Vet. App. 157 (Vet. App. 1995).

Howyer v. Brown, 7 Vet. App. 549 (Vet. App. 1995).

made in the civil action for which the award is sought. Id. The Supreme Court has

defined the term “substantially justified” for purpose of the EAJA as meaning justified in

substance or in the main, that is, justified to a degree that could satisfy a reasonable

person.

A position is substantially justified even though incorrect, if a reasonable

person would think it correct, that is, if it had a reasonable basis in law and fact.

The

government has the burden of proving that its position was substantially justified for

purposes of the EAJA.

Reasonableness is determined by a totality of the

circumstances and not by any single factor.

II. Attorney’s Fees Under the Hyde Amendment

The operative language of the Hyde Amendment provides that a court in any criminal

case may award a prevailing party reasonable attorney’s fees and other litigation

expenses, where the court finds the position of the United States was vexatious,

frivolous, or in bad faith, unless the court finds that special circumstances make such

an award unjust.

A. Alternate Statutory Provisions to Base Awards: § 2412(b) or § 2412(d)

Although the language of the Hyde Amendment incorporates the procedures and

limitations of the EAJA by reference to § 2412, it does not refer more specifically to

either of its alternative procedures provided in subsections 2412(b) and (d). Decisions

in civil cases under the EAJA have found that parties who elect to proceed under

§ 2412(b) are not subject to the procedures and limitations of § 2412(d) (e.g., limiting

fees to C.J.A. rates). Until recently, all Hyde Amendment cases to date sought awards

under the procedures enumerated in § 2412(d). However, one district court has held,

as a matter of law, that the Hyde Amendment permits awards under either of these two

EAJA provisions. United States v. Holland, 34 F. Supp. 2d 346, 357 (E.D. Va 1999).

CC:EL:CT-109857-98/119435-98

The district court in Viglianco rejected the Government’s argument that a grand jury

proceeding, in which criminal charges or an indictment have not been filed, does not

constitute a criminal case. The court’s decision was guided in part by the definition of

the term “case” provided by Black's Law Dictionary (i.e., a general term for an action,

cause, suit or controversy, at law or in equity; a question contested before a court of

justice; and aggregate of facts which furnishes occasion for the exercise of the

jurisdiction of a court of justice; a judicial proceeding for the determination of a

controversy between the parties wherein rights are enforced or protected, or wrongs are

prevented or redressed.)

(continued...)

The Holland court found the language of the Hyde Amendment unambiguous and that

Congress did not intend to limit an applicant's rights to those granted by § 2412(d). The

court found no reason to believe the Hyde Amendment intended to confer lesser rights

upon criminal defendants than the EAJA conferred upon civil litigants. Accordingly, the

court held applicants in criminal cases may make the same election as civil litigants in

claims under the EAJA and, thus, the defendants could proceed under § 2412(b), free

of § 2412(d) limitations (discussed below). By holding that defendants can bypass the

restrictions in subsection (d), the Holland court has significantly expanded the potential

for substantial recoveries under the Hyde Amendment.

B. Awards under Subsection 2412(d)

In order to recover attorney’s fees and expenses under the Hyde Amendment, the

moving party must establish four threshold criteria in his application. The application

must: (1) show the party is a prevailing party; (2) show the party is eligible to receive an

award; (3) contain an itemized statement of the amount of the award sought; and

(4) allege the position of the United States was vexatious, frivolous, or in bad faith.

Although the remedy provided by the Hyde Amendment is modeled on the EAJA and

framed by EAJA procedures and limitations, there are a few important distinctions

between the statutes. Additionally, case law developing under the Hyde Amendment

has created some legal nuances.

The most obvious distinction between the statutes is that the Hyde Amendment

pertains to criminal and not civil cases. What may not be so obvious here, however, is

that the term “case” in this context has been interpreted to include a subpoena to

appear before a grand jury and a subsequent motion to quash. In re: Grand Jury

Subpoena Duces Tecum, Marsha L. Viglianco, 31 F. Supp. 2d 542 (N.D.W.Va.,

December 21, 1998).

CC:EL:CT-109857-98/119435-98

(...continued)

The court also was guided by decisions arising in a different context which supported

the proposition that an issue involving a subpoena is a sufficient "case" to establish

jurisdiction under Article III of the U.S. Constitution. Citing, Boron Oil Co. v. Downie,

873 F.2d 67 (4th Cir. 1989) (where issues relating to the subpoena of a federal

inspector in a civil case in state court properly were removed to federal district court,

although the underlying civil case was not); North Carolina v. Carr, 386 F.2d 129, at 131

(4th Cir. 1967) (where the district court properly took cognizance of case regardless of

whether the contempt proceeding was civil, criminal or sui generis).

Another distinction is that the “position of the United States” at issue is evaluated as to

whether it was vexatious, frivolous, or in bad faith and not whether it was substantially

justified. The Hyde Amendment does not define the terms “vexatious,” “frivolous,” or

“bad faith” or provide any illustrative examples. Courts generally have referred to

definitions provided in Black’s Law Dictionary and case law when evaluating the

position of the government in the underlying case. See, e.g., U.S. v. Gardner, 23 F.

Supp. 2d 1283, 1293 (N.D. Okla. 1998). Black’s Law Dictionary defines the term

“frivolous” to mean “of little weight or importance” and the term “

vexatious

” to mean

“without reasonable or probable cause or excuse.” The Supreme Court has defined

“vexatious” to mean “frivolous, unreasonable, or without foundation, even though not

brought in bad faith.” Christianburg v. EEOC, 434 U.S. 412, 421 (1978). The term “bad

faith,” according to Black’s Law Dictionary, “implies the conscious doing of a wrong

because of dishonest purpose or moral obliquity.” In law enforcement contexts, the

Supreme Court has defined “bad faith” to include a “reckless disregard for the truth.”

Franks v. Delaware, 438 U.S. 154, 171 (1978). Thus, for example, concealing

Brady

material constitutes bad faith for purposes of the Hyde Amendment. United States v.

Ranger Electronic Communications, 22 F. Supp. 2d 667 (W.D. Mich. 1998).

Another important distinction is the Hyde Amendment specifically excepts the

government from bearing the burden of proof otherwise applicable under the EAJA.

Accordingly, the prevailing party bears the burden of showing the government’s position

was vexatious, frivolous and in bad faith.

III. Developing Case Law

A. Filing Period: 30 Day Rule Subject to Reasonableness Exception

In United States v. Ranger Electronic Communications Inc., 22 F. Supp. 2d 667 (W.D.

Mich. 1998), the defendant was a foreign manufacturer of radio equipment indicted for

importing federally banned radio equipment. The government agreed to dismiss the

case with prejudice after trial had begun due to problems that developed in the

CC:EL:CT-109857-98/119435-98

government’s case. Four months after dismissal the defendant moved for attorney’s

fees under the Hyde Amendment. The motion was grounded upon the contention the

government acted in bad faith by concealing

Brady

material -- including e-mail

communications with the Federal Communications Commission regarding public

confusion about federal regulations concerning the importation of electronic equipment

and the need for public notices to clarify those regulations. The defendant did not

discover the government’s failure to disclose this information until after the case was

dismissed.

Subsection 2412(d)(1)(b) of the EAJA requires applications for attorney’s fees be made

within 30 days of final judgment. Notwithstanding this limitation, the court found there

was no judicial precedent as to how the temporal bar should apply to cases where the

government’s bad faith in concealing exculpatory evidence was not revealed until after

the expiration of the 30 day period. The court refused to apply a strict reading of the

limitation period, finding such a reading is diametrically opposed to the purposes of the

Hyde Amendment and would convert the law into an empty legislative promise. The

court concluded that in order to give effect to Congress’ purpose and words, a further

reasonable time period beyond 30 days after judgment should be permitted for the filing

of an application for attorney’s fees. The court then ordered briefing from the parties as

to the exact amount of the award.

B. Prevailing Party

United States v. Gardner, 23 F. Supp. 2d 1283 (N.D. Okla. 1998), the defendant was

a tax preparer indicted on eighteen counts of assisting in the preparation of fraudulent

tax returns in violation of 26 U.S.C. § 7206(2) and three counts of concealing assets in

his bankruptcy. The first three counts alleged Gardner prepared false tax returns for

I.R.S. undercover agents. In a series of motions the government was permitted to

dismiss without prejudice eight of the tax counts and all three bankruptcy counts. The

government subsequently moved to dismiss the remaining counts without prejudice.

The district court granted the motion with the exception of the first three tax counts

involving the I.R.S. undercover agents. Those counts were dismissed with prejudice on

a finding that there was no actual tax matter at issue with respect to the false returns

prepared. Gardner then moved for an award of attorney’s fees pursuant to the Hyde

Amendment.

The district court’s consideration of this issue was a matter of first impression. In the

absence of any evidence of legislative intent to the contrary, the district court

determined the intent of the Hyde Amendment was to import the EAJA to the fullest

extent possible to the criminal context. Based on the totality of the circumstances

CC:EL:CT-109857-98/119435-98

(including the litigation chronology and the fact that Gardner won the relief he sought),

the district court found Gardner was a “prevailing party” within the meaning of the Hyde

Amendment.

The district court granted Gardner’s motion and ordered discovery to enable Gardner to

establish his entitlement to attorney fees and litigation expenses under the Hyde

Amendment. In so ruling the district court made special note that the EAJA requires

review of the underlying agency action at issue. The district court expressly held that

the term “position of the United States” includes the activities of the agency involved in

the matter and is not limited to the litigating position taken by the Department of Justice.

Other courts agree with this view. See, United States v. Ranger Electronic

Communications Inc., 22 F. Supp. 2d 667 (W.D. Mich. 1998) (actions by FCC); United

States v. Holland, 34 F. Supp. 2d 346 (E.D. Va 1999) (action by FDIC). Ultimately, an

award was granted under the terms of a settlement agreement.

C. Acquittal Alone Is Insufficient For Award of Attorney’s Fees

United States v. Reyes, 16 F. Supp. 2d 759 (S.D. Tex. 1998), the defendant was

indicted by a grand jury on one count of conspiracy and three counts of aiding and

abetting federal program bribery in violation of 18 U.S.C. §§ 371 and 666. At the

conclusion of the government’s case in chief, the defendant moved for a judgment of

acquittal. After examining the evidence in the light most favorable to the government,

the district court determined a rational trier of fact could not have found the "essential

elements of the offense beyond a reasonable doubt" and granted the defendant’s

motion. The defendant then filed a motion to recover attorney's fees and litigation

expenses from the Justice Department pursuant to the Hyde Amendment.

On review of the motion, the district court determined the defendant did not carry his

burden of proof to entitle him to an award of attorney’s fees. He provided no evidence

the government instituted its charges against him in a "vexatious" or "frivolous" manner

or in bad faith. At most, he simply relied on the district court's granting of the judgment

of acquittal as support for his motion for attorney's fees. While the district court

determined the government had not carried its burden pursuant to Rule 29(a), it

carefully examined and considered the evidence before reaching that determination.

Several items of evidence produced against the defendant during the trial undermined

his position that the charges were frivolous or brought in bad faith. These items

included video and audio tape recordings of meetings between the defendant and his

co-conspirators indicating their intention to bribe certain officials. The court determined

the Government exercised proper discretion when it decided to charge the defendant

with the counts of conspiracy and aiding and abetting federal program bribery. Thus,

the court denied the defendant’s motion for attorney’s fees. See also, United States v.

CC:EL:CT-109857-98/119435-98

Troisi, 13 F. Supp. 2d 595, 596 (N.D. W.Va 1998) (acquittal alone does not

automatically entitle that party to compensation under the statutory scheme).

D. Hyde Amendment Award under Subsection 2412(b)

In United States v. Holland, 34 F. Supp. 2d 346 (E.D. Va 1999), the defendants, the

President and CEO of a bank, were investigated by the FDIC regarding seven loan

transactions. The defendants cooperated fully in the FDIC investigation, no evidence of

criminal wrongdoing was uncovered and the matter was resolved administratively under

a settlement agreement. The FDIC then initiated and reopened a criminal referral of

the defendants on bank fraud charges stemming from the same loan transactions.

They were indicted, tried and acquitted on all 33 counts of bank fraud. The prevailing

defendants moved for attorneys fees and litigation expenses pursuant to the Hyde

Amendment and 28 U.S.C. § 2412(b) of the EAJA. Based on an amount stipulated by

the parties, the district court awarded the two prevailing defendants a total of

$570,678.00 in attorneys fees and litigation expenses.

As discussed above, the court first held the defendants could proceed under § 2412(b),

free of § 2412(d) limitations. The court then considered the issue of vexatiousness. It

framed the applicable test as whether the defendants had proven that a reasonable

FDIC decision maker and a reasonable prosecutor knew or should have had reason to

know the criminal referrals and the continued prosecution were lacking justification,

intended to harass, or constituted harassment by process of law. Based on a

preponderance of the evidence, the court concluded the defendants proved the conduct

of both the FDIC and the prosecutor were vexatious. With regard to the FDIC, the court

found the initiation and reopening of the criminal referral were motivated by

impermissible considerations; the FDIC used the threat of criminal prosecution and

attendant publicity to unduly influence the settlement of the administrative action; and

the FDIC impermissibly used the criminal referral as a substitute for its admittedly

unsuccessful civil administrative proceedings against the defendants. The court then

found prosecution’s conduct was a corollary of the FDIC's vexatious use of criminal

proceedings to accomplish its civil administrative enforcement objectives. The

prosecution possessed no evidence of criminal conduct, no evidence of the requisite

criminal intent for each count, and deliberately misled the court to obtain admission of

certain favorable evidence.

The court apportioned the amount of the award on a pro rata basis. Because

prosecutions are controlled in the final instance by the U.S. Attorney's Office, the court

found it should bear the greater portion. The court found 67% of the obligation should

be borne by the Department of Justice and the remaining 33% by the FDIC.