In the
United States Court of Appeals
For the Seventh Circuit

No. 99-1948

United States of America,

Plaintiff-Appellee,

v.

Hallmark Construction Company,

Defendant-Appellant.



Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97-C-3682--Suzanne B. Conlon, Judge.


Argued December 1, 1999--Decided January 11, 2000




       Before Bauer, Cudahy and Flaum, Circuit Judges.

      Flaum, Circuit Judge. The United States filed
suit on behalf of the Army Corps of Engineers
(the "Corps") charging Hallmark Construction
Company ("Hallmark") with discharging pollutants
into a wetland in violation of the Clean Water
Act ("CWA"), 33 U.S.C. sec. 1251 et seq. The
trial court found in favor of Hallmark on the
merits but denied Hallmark the attorney’s fees it
requested under the Equal Access to Justice Act
("EAJA"), 28 U.S.C. sec. 2412. Hallmark now
appeals the denial of attorney’s fees. For the
reasons stated herein, we remand.

I.   BACKGROUND

      In 1988, Hallmark purchased a plot of land
known as Area B, a natural topographical
depression situated in the middle of the Swift
Research Farm in Frankfort, Illinois. In 1989,
Hallmark began a construction project on Area B
that involved filling some parts of the
depression. It is a violation of the CWA to
discharge pollutants into an area identified as
a wetland without a permit or some form of
mitigation. Therefore, in 1990, Hallmark hired
Planning Resources, Inc. ("PRI") to identify
potential wetlands that its construction might
affect. PRI identified Area B as a "farmed
wetland." Hallmark promptly provided the PRI
report to the Corps, and the Corps requested that
Hallmark develop a plan to mitigate the damage
caused by its discharge of pollutants into Area
B. In 1995, Hallmark employed SDI Consultants,
Ltd. ("SDI") to assist in developing a mitigation
plan for Area B. However, SDI came to the
conclusion that Area B was not a wetland and
required no mitigation. Hallmark provided SDI’s
report to the Corps. However, the Corps continued
to believe that Area B was a wetland and to
demand mitigation.

      On May 19, 1997, the Corps, through the United
States Attorney, filed a complaint against
Hallmark alleging that Hallmark had violated the
CWA by discharging pollutants into Area B.
Hallmark contested this allegation, arguing that
Area B was not a wetland. Hallmark provided the
Corps with documents, studies and the deposition
testimony of witnesses to support its contention
that Area B was not a wetland. Hallmark’s chief
argument was that Area B was not inundated with
water for a long enough period of time to qualify
as a wetland under applicable wetland delineation
criteria. The Corps persisted with its complaint,
and Hallmark moved for summary judgment. The
district court initially concluded that the Corps
was not empowered to enforce the CWA against
Hallmark and granted summary judgment for
Hallmark on this basis. Then, on a motion from
the government to reconsider, the district court
reversed its ruling and denied summary judgment
to Hallmark. In its second summary judgment
order, the district court determined that, among
other things, there were genuine factual disputes
concerning the attractiveness of Area B as a
habitat for migratory birds and the actual length
of time for which Area B was inundated during the
growing season. However, the district court also
stated that "[t]he United States may face an
uphill battle in convincing a jury to credit its
interpretation of [the evidence]." The court then
set the case for a bench trial.

      At this point, Hallmark’s attorneys filed a
motion with the court for leave to withdraw
because Hallmark was unable to pay its attorney’s
fees, but the trial court denied this motion.
Hallmark’s attorneys went forward to ably
represent Hallmark at trial, and the district
court ruled in favor of Hallmark. In its merits
opinion, the district court stated that much of
the Corps’ evidence rested on speculation and
conjecture and found that the Corps’
determination that Area B was a wetland was an
arbitrary and capricious application of the CWA.
Hallmark then petitioned to recover attorney’s
fees from the government under the EAJA. The
district court denied Hallmark’s motion, finding
that the government’s position in the litigation
had been substantially justified. Hallmark now
appeals.

II.   DISCUSSION

       Hallmark appeals only the district court’s
denial of its motion for attorney’s fees under
the EAJA. We review the district court’s decision
in this matter for an abuse of discretion. Pierce
v. Underwood, 487 U.S. 552, 558 (1988); Jackson
v. Chater, 94 F.3d 274, 278 (7th Cir. 1996).
However, "this deferential standard does not
dilute our meaningful examination of the district
court’s decision." Jackson, 94 F.3d at 278; see
Marcus v. Shalala, 17 F.3d 1033, 1037 (7th Cir.
1994).

      The EAJA provides that a district court may
award attorney’s fees where 1) the claimant is a
"prevailing party"; 2) the government’s position
was not substantially justified; 3) no "special
circumstances make an award unjust"; and 4) the
fee application is submitted to the court within
30 days of final judgment and is supported by an
itemized statement. 28 U.S.C. sec. 2412(d)(1)(A),
(B); Commissioner, INS v. Jean, 496 U.S. 154, 158
(1990). It is uncontested that Hallmark was the
prevailing party and that the fee application was
timely filed. In addition, no "special
circumstances" are alleged. Therefore, the only
question for us on appeal is whether the district
court abused its discretion in finding that the
government’s position was substantially
justified.

      Ordinarily, we give the district court’s
conclusion on the question of substantial
justification considerable deference because "the
district court may have insights not conveyed by
the record, into such matters as whether
particular evidence was worthy of being relied
upon, or whether critical facts could easily have
been verified by the Government." Pierce, 487
U.S. at 560. However, in this case, it is not
apparent that the district court applied the
proper legal standard to arrive at its conclusion
regarding the justification of the government’s
position. Therefore, deference to that court’s
special competence in evaluating factual matters
does not end our inquiry.

      The reason given by the trial court for its
denial of Hallmark’s petition is as follows:

While this court found Hallmark’s evidence
regarding Area B more persuasive, the
government’s case was far from baseless. There
existed a genuine dispute over which reasonable
minds could differ. For that reason, Hallmark’s
attempts to secure judgment prior to trial
failed. . . . Failure to prevail at trial does
not necessarily mean that the government’s
litigative position was unreasonable or
unjustified.

Order Denying Attorney’s Fees, April 5, 1999.
This brief statement of the district court’s
reasoning might be satisfactory in some cases.
However, it is an insufficient explanation of
that court’s conclusion in this case. Although
there is no presumption that a prevailing party
against the government will recover attorney’s
fees under the EAJA, Marcus, 17 F.3d at 1036, the
government bears the burden of proving that its
position meets the substantially justified
standard, id., see also Jackson, 94 F.3d at 278.
In this case, the trial court had found in its
merits opinion that "[t]he Corps’ conclusion
[that Hallmark violated the CWA] was arbitrary
and capricious because it was not based on a
consideration of the relevant factors and
evidence." United States v. Hallmark Constr. Co.,
30 F.Supp. 2d 1033, 1041 (N.D. Ill. 1998). The
district court also had determined that "[m]uch
of the government evidence rested on speculation
and conjecture." Id. at 1039. While these
conclusions alone may not mandate an award of
attorney’s fees, they do raise the question of
how the government was able to prove the
substantial justification of its position in
light of the district court’s ultimate findings.
See Marcus, 17 F.3d at 1038 (noting that strong
language against the government’s position in an
opinion discussing the merits of a key issue is
evidence in support of an award of EAJA fees);
Cummings v. Sullivan, 950 F.2d 492, 498 (7th Cir.
1991) (finding that "the closeness of the
question is, in itself, evidence of substantial
justification"). Where, as here, the trial
court’s merits opinion so strongly favors the
defendant against the government, a more thorough
explanation for denying attorney’s fees to the
prevailing party is warranted.

      We recognize that the mere finding that the
government’s position was arbitrary and
capricious does not mandate an award of
attorney’s fees under the EAJA. The outcome of a
case is not conclusive evidence of the
justification for the government’s position. See
Pierce, 487 U.S. at 569 ("Conceivably, the
Government could take a position that is not
substantially justified, yet win; even more
likely, it could take a position that is
substantially justified, yet lose."). Similarly,
the stage of the proceedings at which the case is
disposed of also does not mandate a particular
finding on the issue of attorney’s fees. See id.
at 568-69 (explaining that the fact that the
government was unable to survive summary judgment
does not mandate an award of attorney’s fees).
While the district court may consider objective
criteria such as these when they are relevant, we
caution that these objective factors are rarely
conclusive. See id. at 568-69. It is more
important for the district court to examine "the
actual merits of the Government’s litigating
position." Id. at 569. This analysis will vary
considerably with the circumstances of each case.
However, it is rare that a single factor will be
dispositive of whether the government’s position
was substantially justified, and the district
court’s analysis should contain an evaluation of
the factual and legal support for the
government’s position throughout the entire
proceeding. We find the district court’s brief
description of its reasoning in this case
especially troubling, as we are left with the
impression that the mere fact that the government
succeeded in surviving summary judgment was
central to the trial court’s determination that
its position was substantially justified.

      While the resolution of the attorney’s fees
question "’should not result in a second major litigation,’"
Pierce, 487 U.S. at 563 (quoting Hensley v.
Eckerhart, 461 U.S. 424, 437 (1983)), when
considering this issue the district court must
reexamine the legal and factual circumstances of
the case from a different perspective than that
used at any other stage of the proceeding, see
Cummings, 950 F.2d at 498 (stating that
"substantial justification" and "substantial
evidence" are different standards used at
different stages of the proceeding); see also
Pierce, 487 U.S. at 568-69 (noting that
substantial justification is not equivalent to
the summary judgment standard). This Court has
described the substantial justification standard
as requiring that the government show that its
position was grounded in "’(1) a reasonable basis
in truth for the facts alleged; (2) a reasonable
basis in law for the theory propounded; and (3)
a reasonable connection between the facts alleged
and the legal theory advanced.’" Phil Smidt &
Son, Inc. v. NLRB, 810 F.2d 638, 642 (7th Cir.
1987) (quoting Donovan v. Dial America Mkting,
Inc., 757 F.2d 1376, 1389 (3d Cir. 1985))./1 In
addition, there is also a certain element of
policy involved in the award of attorney’s fees
under the EAJA. The potential threat of having to
pay for the litigation costs of the opposing
party may serve as an encouragement to government
agencies to investigate, prepare and pursue
litigation against private parties in a
professional and appropriate manner. Likewise,
the potential for recovering the expenses a
private party puts forward to oppose the
government encourages members of the public to
assist in the "valuable public service [of]
improving the efficiency of government
operations." Gotches v. Heckler, 773 F.2d 108,
111 (7th Cir. 1985).

      In making a determination of substantial
justification, the district court must examine
the government’s conduct in both the
prelitigation and litigation contexts. See
Marcus, 17 F.3d at 1036 ("[F]ees may be awarded
in cases where the government’s prelitigation
conduct was not substantially justified even
though its litigating position may have been
substantially justified and vice versa."). For
example, we have held that an EAJA award may be
justified where an agency knows before trial that
there is conflicting evidence on a key point it
is required to prove and it "fail[s] to take
adequate measures to assess that evidence." Phil
Smidt, 810 F.2d at 643. In this case, the
government apparently had full knowledge before
trial of Hallmark’s conflicting evidence
regarding the central issue of the inundation
period for Area B. We would expect the district
court’s attorney’s fees opinion to address, among
other things, whether it was reasonable for the
government to proceed to trial if it had
adequately assessed Hallmark’s computer modeling
and eye-witness testimony as compared to its own
evidence on this issue.

      The district court’s analysis must not end
here, however. A determination of substantial
justification requires the district court to
examine the position the government took at the
litigation stage as well. For example, we have
concluded that "even if an agency’s legal
argument is perfect . . . , the agency may still
be liable for costs, fees and expenses under the
EAJA if the agency has knowledge that the
presumed facts supporting its position are
without merit." Phil Smidt, 810 F.2d at 642. In
this case, the government was unable to prove at
trial the required minimum 15 day inundation
period. We would expect the district court’s
attorney’s fees opinion also to address whether
the government was substantially justified in
pressing forward with the suit given the factual
support it had for the legal elements it was
required to prove.

      Finally, we note that the trial court does not
make separate determinations regarding each stage
but "arrive[s] at one conclusion that
simultaneously encompasses and accommodates the
entire civil action." Jackson, 94 F.3d at 278.
This global assessment comprehends that the
district court will examine not simply whether
the government was substantially justified in its
position at the beginning or end of the
proceedings, but whether the government was
substantially justified in continuing to push
forward at each stage. See Quality C.A.T.V., Inc.
v. NLRB, 969 F.2d 541, 545 (7th Cir. 1992)
(holding that the government’s position was
substantially justified only up to the point in
the proceedings at which it became apparent that
its theory was "unsupportable"). We understand
that the standard for evaluating the
appropriateness of awarding attorney’s fees under
the EAJA is somewhat nebulous. It is for this
reason that we require a thorough explanation of
the reasoning behind the district court’s
decision in cases such as the one before us,
where the district court’s conclusion on the
merits that the government’s position was
"arbitrary and capricious" appears, at least on
the surface, to be at odds with its subsequent
conclusion that the government’s position was
"substantially justified."

III.   CONCLUSION

      We cannot determine on the record before us
whether the district court abused its discretion
in denying attorney’s fees to Hallmark, the
prevailing party in this matter. Therefore, we
Remand for the district court to reexamine the
issue of attorney’s fees consistent with this
opinion.




/1 We are aware that Phil Smidt was decided one year
before Pierce, where the Supreme Court addressed
the proper application of the substantial
justification standard. However, the Phil Smidt
formulation was an elaboration on the term having
"a reasonable basis in law and fact" that the
Supreme Court expressly found was an acceptable
interpretation of "substantial justification."
See Pierce, 487 U.S. at 565 ("[Our
interpretation] is no different from the
’reasonable basis both in law and fact’
formulation adopted by the Ninth Circuit and the
vast majority of other Courts of Appeals.")
(citing Ramos v. Haig, 716 F.2d 471, 473 (7th
Cir. 1983)).
