UNITED STATES COURT OF APPEALS Tenth Circuit Byron White United States Courthouse 1823 Stout Street Denver, Colorado 80294 (303) 844-3157 Patrick J. Fisher, Jr. Elisabeth A. Shumaker Clerk Chief Deputy Clerk
April 30, 1997
TO: All recipients of the captioned opinion
RE: 96-6015, Towerridge Inc. v. T.A.O. Inc. April 15, 1997
Please be advised of the following correction to the captioned decision:
The identification of the attorneys for Defendants-Appellants and Cross-Appellees is incorrect. The identification should read as follows:
Charles E. Raley (W. Drew Mallender with him on the briefs) of Watt, Tieder & Hoffar, L.L.P., McLean, Virginia, for Defendants-Appellants and Cross- Appellees.
Please make the appropriate correction.
Very truly yours,
Patrick Fisher, Clerk
Susie Tidwell Deputy Clerk F I L E D United States Court of Appeals Tenth Circuit PUBLISH APR 15 1997 UNITED STATES COURT OF APPEALS PATRICK FISHER Clerk TENTH CIRCUIT
TOWERRIDGE, INC., sued as United States of America for the Benefit of Towerridge, Inc.,
Plaintiff-Appellee and Cross-Appellant, Nos. 96-6015 & v. 96-6107
T.A.O., INC., and MID-CONTINENT CASUALTY CO.,
Defendants-Appellants and Cross-Appellees.
Appeal from the United States District Court for the Western District of Oklahoma (D.C. No. CIV-95-42BL)
Patsy H. Brown (Michael L. Loyd with her on the briefs) of Michael L. Loyd & Associates, Bethany, Oklahoma, for Plaintiff-Appellee and Cross-Appellant.
Charles E. Raley (W. Drew Mallender with him on the briefs) of Watt, Tieder & Hoffar, L.L.P., McLean, Virginia, for Defendants-Appellants and Cross- Appellees.
Before BALDOCK, BRORBY and MURPHY, Circuit Judges.
BRORBY, Circuit Judge.
I. BACKGROUND This action was brought by Towerridge, Inc., a subcontractor on a federal
construction project, against the prime contractor, T.A.O., Inc., and T.A.O.'s
surety on the prime contract, Mid-Continent Casualty Company. Towerridge sued
under the Miller Act, 40 U.S.C. §§ 270a-270d (1994), seeking recovery for sums
allegedly due and owing under its subcontract. The jury awarded Towerridge
$56,963.94 in damages and, in response to a special interrogatory, found T.A.O.
acted in bad faith. The district court entered judgment accordingly, and later
awarded Towerridge prejudgment interest and attorneys' fees. T.A.O. appeals the
award of damages, the award of prejudgment interest, and the award of attorneys'
fees. It also appeals the district court's admission into evidence of references to a
separate action between T.A.O. and the government. Towerridge cross-appeals
the district court's failure to note the jury's finding of bad faith on its entry of
judgment. We reverse the district court's award of attorneys' fees and affirm the
district court on all other issues.
T.A.O. was the prime contractor on a construction project for the Oklahoma
Air National Guard in Oklahoma City. Because the project was federally funded,
T.A.O. was required under the Miller Act to post a payment bond to protect
-2- subcontractors and materialmen. 1 Co-defendant Mid-Continent Casualty Co. was
the surety on the bond.
Under the prime contract, T.A.O. submitted monthly payment applications
to the government. These payment applications stated the scheduled value of
each of sixty-nine line-item tasks which made up T.A.O.'s obligations under the
contract, the sum of which equaled the contract price. The applications also
provided estimated percentages of completion of both the actual line item tasks
and their scheduled values. Upon receipt of the applications, the government paid
T.A.O. the percentage of scheduled values completed, minus a retainage due upon
completion of the project.
Towerridge subcontracted with T.A.O. to perform most of the concrete and
asphalt paving work for the project. The total subcontract price was $448,520.00.
The subcontracted work was broken down into four line items: (1) concrete
paving, dowels and sawing, (2) curb and gutter, (3) sealant, and (4) rock and
1 The Miller Act thus provides an alternative remedy to the mechanics' liens ordinarily available on private construction projects. United States ex rel. C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533, 1537 n.1 (10th Cir. 1987). Because a lien cannot attach to federal property, those supplying labor or materials are instead protected by the payment bond. Id.
-3- asphalt. The subcontract assigned each line item a scheduled value representing
its proportionate value of the whole; thus the sum of the scheduled values equaled
the subcontract price. T.A.O. was to make monthly progress payments to
Towerridge for work satisfactorily completed, minus a ten percent retainage. To
that end, Towerridge submitted monthly payment applications to T.A.O. providing
estimated completion percentages of the line-item tasks, and the appropriate
percentage of each line item's scheduled value to which Towerridge was therefore
entitled. Thus, ideally, upon Towerridge's completion of twenty percent of a line
item, T.A.O. was to pay Towerridge twenty percent of that line item's scheduled
value; when Towerridge had completed ninety percent of a line item it was
entitled to ninety percent of the scheduled value, and so forth. 2
Towerridge started work in June 1993. However, nearly from the
beginning of Towerridge's performance, T.A.O. and Towerridge disagreed over
whether Towerridge was working sufficiently productively and efficiently to
complete its work on schedule. Timely completion of all portions of the project
was of particular importance to T.A.O. because its prime contract contained a
2 Actually, these payments would be less the ten percent retainage due upon Towerridge's completion of performance. However, because T.A.O. does not contest Towerridge's right to the retainage, we do not concern ourselves with this issue. See State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 984 n.7 (10th Cir. 1994) (issues not raised in opening brief deemed waived).
-4- liquidated damages clause rendering T.A.O. liable to the government for $296.85
for each day completion was delayed beyond the scheduled completion date.
The parties dispute to whom blame for any delays or defects in
Towerridge's performance should be attributed. Both note delays and disruptions
caused by the government hampered completion of the overall project; however,
they disagree on the extent the government's actions impaired Towerridge's ability
to perform. Towerridge asserts it was at all times ready and able to meet its
obligations under the subcontract, and that any delays in its performance were
caused by T.A.O. and the government's failure to satisfy necessary preconditions
to Towerridge's performance, such as clearing, grading and surveying.
Additionally, Towerridge claims T.A.O. failed to properly schedule, supervise,
and coordinate the project, and that any defects in its work were the result of
T.A.O.'s inadequate project management rather than the fault of Towerridge.
T.A.O., on the other hand, contends Towerridge repeatedly left the work site and
failed to use sufficient workers to timely complete its work, even after T.A.O.
repeatedly warned of the necessity for Towerridge to increase its workforce and
speed its performance. T.A.O. also contends Towerridge's work was substandard,
containing numerous defects requiring repair or reconstruction, further delaying
-5- completion. Eventually, T.A.O. hired supplemental subcontractors to complete
and correct the work Towerridge was to have performed.
Moreover, with the exception of Towerridge's first monthly payment
application in July 1993, T.A.O. and Towerridge did not agree on the percentage
of work completed by Towerridge. For example, the completion percentages set
forth in Towerridge's second pay application resulted in a claim to T.A.O. for
$110,817.00. However, T.A.O. only paid Towerridge $92,248.20. By the time
T.A.O. terminated Towerridge, their opinions on the amount of work completed
had grown further disparate. Towerridge's fifth, and final, pay application
showed 87% completion of the concrete paving, 67% completion of the curb and
gutter work, 82% completion of the sealant, and 53% completion of the asphalt
paving. However, T.A.O. claimed Towerridge had actually completed only 73%,
59%, 73%, and 35% of each line item, respectively, and paid Towerridge
accordingly.
Towerridge brought suit for the sums it claimed were due and owing for
work allegedly performed. At trial, it asserted entitlement to $56,963.94. It
reached this figure by subtracting the amount paid by T.A.O. ($245,875.82) from
the amount, not including retainage, billed T.A.O. for work completed
-6- ($322,335.90), totaling $76,460.08. It then added $35,815.90 in withheld
retainage, $3,133.00 for work performed under a change order modifying the
original subcontract, and $677.00 for labor provided subsequent to its final pay
application. Finally, it credited T.A.O. for $47,287.04 T.A.O. paid directly to one
of Towerridge's suppliers and $11,835.00 T.A.O. paid directly to a sub-contractor
of Towerridge, arriving at the final total of $56,963.94.
II. ANALYSIS
A. Damages Award
T.A.O. first asserts the district court erred in refusing to grant T.A.O.'s
motion for judgment as a matter of law, in which T.A.O. claimed Towerridge was
not entitled to recover under the Miller Act because it had failed to provide any
evidence of sums owed for work performed under the subcontract. We review the
district court's denial of T.A.O.'s motion de novo, Haines v. Fisher, 82 F.3d 1503,
1510 (10th Cir. 1996), applying the same standard as the district court, see
Harolds Stores, Inc. v. Dillard Dep't Stores, Inc., 82 F.3d 1533, 1546 (10th Cir.),
cert. denied, 117 S. Ct. 297 (1996). "It is appropriate for a trial court to enter
judgment as a matter of law 'if during a trial by jury a party has been fully heard
on an issue and there is no legally sufficient evidentiary basis for a reasonable
jury to find for that party on that issue.'" Mitchell v. Maynard, 80 F.3d 1433,
-7- 1438 (10th Cir. 1996) (quoting Fed. R. Civ. P. 50(a)). "Under this standard, we
may find error in the denial of such a motion only if the evidence points but one
way and is susceptible to no reasonable inferences supporting the party opposing
the motion." Haines, 82 F.3d at 1510. "We construe the evidence and inferences
most favorably to the nonmoving party." Doan v. Seagate Tech., Inc., 82 F.3d
974, 976 (10th Cir. 1996), cert. denied, 117 S. Ct. 684 (1997).
T.A.O. contends that to recover damages under the Miller Act, Towerridge
must establish by substantial evidence actual work performed, actual overhead, or
actual lost profits, for which it had not been paid. 3 T.A.O. argues Towerridge
failed to meet its burden of proof, essentially making a factual argument that
Towerridge failed to prove any sums were justly due and owing under the
subcontract. We are not convinced by T.A.O.'s argument.
3 At times T.A.O.'s position on appeal seems to be that Towerridge is entitled only to payment for actual costs incurred in supplying labor and materials. However, it later admits Towerridge may be entitled to overhead and lost profit, albeit only if proven with sufficient certainty, which proof it claims is lacking. We agree with the district court that the appropriate measurement of damages is that percentage of the subcontract price equal to the percentage of work Towerridge completed, thereby ensuring both parties the benefit of their bargain. See East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 870 (1986) (noting benefit of bargain to be "traditionally the core concern of contract law"). Indeed, T.A.O. admitted as much to the trial judge.
-8- Under the subcontract, Towerridge is entitled to a percentage of the
subcontract price equal to the percentage of work completed. Thus, whether
Towerridge is entitled to recovery from T.A.O. turns upon the percentage of work
completed. If the completion percentages asserted by T.A.O. are correct, then
T.A.O. has paid Towerridge for its work and Towerridge is entitled to no further
recovery; if the completion percentages asserted by Towerridge are correct, then
T.A.O. has underpaid Towerridge and recovery is warranted.
At trial, Towerridge presented two primary forms of evidence supporting
the accuracy of its asserted work completion percentages. First, it offered its pay
applications to T.A.O., which set forth the asserted percentages. Roy Spradling,
the Towerridge project manager who determined the percentages, testified as to
their accuracy. Second, Towerridge pointed to the monthly pay applications
submitted by T.A.O. to the government. The T.A.O. pay applications contained
four line items apparently equivalent to those in the Towerridge subcontract:
concrete paving, asphalt paving, curb and gutter, and paving sealants. 4 The
4 The scheduled values of three of the four were identical or nearly so to those in the Towerridge subcontract: T.A.O. valued the concrete paving at $310,768.00, compared to Towerridge's $312,384.00; the curb and gutter work at $21,129.00, the same as Towerridge; and the asphalt paving at $77,000.00, $1,000 less than Towerridge. Only T.A.O.'s scheduled value for sealant was substantially different from Towerridge's: $21,700.00 versus $33,874.00.
-9- completion percentages reported by T.A.O. in their pay applications conflicted
with those asserted by T.A.O. at trial.
Construing all the evidence and inferences therefrom in the light most
favorable to Towerridge, see Doan, 82 F.3d at 976, and mindful that assessments
of the credibility of witnesses are within the exclusive province of the jury,
United States v. Davis, 965 F.2d 804, 811 (10th Cir. 1992), cert. denied, 507 U.S.
910 (1993), we find the evidence presented by Towerridge was a legally sufficient
evidentiary basis upon which a reasonable jury could find in Towerridge's favor.
Accordingly, we affirm the district court's refusal to grant T.A.O.'s motion for
judgment as a matter of law.
B. Prejudgment Interest Award
The district court, in awarding Towerridge prejudgment interest, stated the
allowance of prejudgment interest in a Miller Act case to be a matter of federal
law. T.A.O. argues that, contrary to the district court's decision, applicable state
law, here that of Oklahoma, controls whether an award of prejudgment interest is
appropriate. T.A.O. asserts under Oklahoma law Towerridge is not entitled to
such interest because the amount of damages was not liquidated or otherwise
sufficiently certain prior to trial. See Okla. Stat. Ann. tit. 23, § 6 (West 1987).
-10- "The decision whether ... to allow prejudgment interest rests within the sound
discretion of the trial court. Accordingly, the standard of review on appeal is
whether the trial court abused its discretion in awarding ... prejudgment interest."
U.S. Indus., Inc. v. Touche Ross & Co., 854 F.2d 1223, 1255 n.43 (10th Cir. 1988)
(citations omitted); accord Malloy v. Monahan, 73 F.3d 1012, 1019 (10th Cir.
1996).
Under the abuse of discretion standard "a trial court's decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances. When we apply the 'abuse of discretion' standard, we defer to the trial court's judgment because of its first-hand ability to view the witness or evidence and assess credibility and probative value."
Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (quoting McEwen v. City of
Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991)). In this circuit, abuse of
discretion is defined as "'an arbitrary, capricious, whimsical, or manifestly
unreasonable judgment.'" FDIC v. Oldenburg, 34 F.3d 1529, 1555 (10th Cir.
1994) (quoting United States v. Hernandez-Herrera, 952 F.2d 342, 343 (10th Cir.
1991)).
The district court noted that although prejudgment interest is ordinarily
awarded in federal cases, it is not recoverable as a matter of right. See Malloy, 73
F.3d at 1019 (quoting Zuchel v. City & County of Denver, 997 F.2d 730, 746
-11- (10th Cir. 1993)). Accordingly, it employed the two-step analysis this court has
previously set forth as appropriate for determining whether to award prejudgment
interest in cases arising under federal law. "'First, the trial court must determine
whether an award of prejudgment interest would serve to compensate the injured
party. Second, when an award would serve a compensatory function, the court
must still determine whether the equities would preclude the award of
prejudgment interest.'" Malloy, 73 F.3d at 1019 (quoting Touche Ross, 854 F.2d
at 1257). The district court found the requirements of this test to be satisfied. It
then applied the interest rate charged on judgments in Oklahoma to determine the
amount of the award, stating interest at that rate would be appropriate to
compensate Towerridge for the true costs of the money damage incurred.
In arguing Oklahoma law controls whether Towerridge is entitled to a
prejudgment interest award, T.A.O. relies on United States ex rel. C.J.C., Inc. v.
Western States Mechanical Contractors, Inc., 834 F.2d 1533 (10th Cir. 1987), in
which we looked to state law in determining whether two Miller Act plaintiffs
were entitled to an award of prejudgment interest. In Western States we
interpreted the Supreme Court's pronouncement in F.D. Rich Co. v. United States
ex rel. Industrial Lumber Co., 417 U.S. 116 (1974), that the Miller Act "'provides
a federal cause of action, and the scope of the remedy as well as the substance of
-12- the rights created thereby is a matter of federal not state law,'" to mean allowance
of prejudgment interest in cases arising under the Miller Act is a matter of federal
law. Western States, 834 F.2d at 1541. In so finding, we adopted the reasoning
of the United States Court of Appeals for the Fifth Circuit:
Since prejudgment interest falls within the "scope of the remedy" available to a Miller Act claimant, it appears that under the authority of F.D. Rich, its allowance must be initially determined as a matter of federal law.
Such a determination, however, merely leads us back to state law. Neither the Miller Act nor any other applicable federal law provides standards for the allowance of prejudgment interest. It therefore seems appropriate to look to state law "as a matter of convenience and practicality."
Id. (quoting United States ex rel. Georgia Elec. Supply Co. v. U.S. Fidelity &
Guar. Co., 656 F.2d 993, 997 (5th Cir. 1981)); see also, e.g., United States ex rel.
Bartec Indus., Inc. v. United Pac. Co., 976 F.2d 1274, 1279 (9th Cir. 1992);
United States v. American Mfrs. Mut. Cas. Co., 901 F.2d 370, 372-73 (4th Cir.),
cert. denied, 498 U.S. 851 (1990). Though we explicitly disagreed with the Fifth
Circuit's blanket statement that no federal law bore on the issue, we "chose[] to
look to [state] law" for guidance whether to award prejudgment interest, and the
appropriate interest rate to apply. Western States, 834 F.2d at 1541 n.6, 1542-45.
However, we clearly, and repeatedly, stated prejudgment interest awards on
Miller Act claims are governed by federal law, not state law. Id. at 1541 & n.6,
-13- 1545. Indeed, in fixing the award granted we applied the interest rate stated in
the state statute governing prejudgment interest at the time of our decision, rather
than the statutory rate applicable at the time the debt was incurred as would have
been appropriate under state law. See id. at 1544-45. We did so recognizing that
because the prejudgment interest award was governed by federal law, we were
free to choose any interest rate which would "fairly compensate the plaintiff for
the delay in the receipt of payment." Id. at 1545 (quoting United States v. West
Virginia, 764 F.2d 1028, 1031 (4th Cir. 1985), aff'd, 479 U.S. 305 (1987)). We
deemed the then current state interest rate would accomplish that purpose. Id.
Thus, the district court was under no mandate to follow Oklahoma law in
the instant case. Accordingly, its consideration of the issue under now well-
established principles of federal law, see, e.g., Malloy, 73 F.3d at 1019; Frymire
v. Ampex Corp., 61 F.3d 757, 773-774 (10th Cir. 1995), cert. dism'd, 116 S. Ct.
1588 (1996); Zuchel, 997 F.2d at 746; Anixter v. Home-Stake Prod. Co., 977 F.2d
1549, 1554 (10th Cir. 1992), cert. denied, 507 U.S. 1029 (1993); Eastman Kodak
Co. v. Westway Motor Freight, Inc., 949 F.2d 317, 321 (10th Cir. 1991); Touche
Ross, 854 F.2d at 1257, was not an abuse of discretion, and will not be reversed.
C. Award of Attorneys' Fees
-14- The district court found T.A.O. had acted in bad faith, and, premised upon
that finding, awarded Towerridge attorneys' fees of $43,195.00. T.A.O. contends
the district court erred in doing so, presenting three arguments. First, T.A.O.
claims the court erred in finding T.A.O. acted in bad faith. Second, T.A.O.
argues a finding of bad faith is not grounds for an award of attorneys' fees in a
Miller Act case. Third, T.A.O. argues that even if bad faith can be grounds for
such an award, the bad faith must be in bringing, maintaining, or defending a
lawsuit; bad faith in conduct giving rise to the litigation is insufficient. Here,
T.A.O. asserts the district court's finding of bad faith was premised solely on
events preceding the lawsuit, and that the court made no finding the defendants
engaged in any improper conduct related to the actual litigation. We accept
T.A.O.'s third argument, holding an award of attorneys' fees may not be premised
solely on prelitigation conduct. Finding no evidence T.A.O. acted in bad faith
during the course of the lawsuit, we reverse the district court's award of attorneys'
fees. Because we reverse the district court on those grounds, we need not, and do
not, address T.A.O.'s first argument regarding the correctness of the district
court's finding that T.A.O. acted in bad faith. See Griffin v. Davies, 929 F.2d
550, 554 (10th Cir.) (appellate court will not "undertake to decide issues that do
not affect the outcome of a dispute"), cert. denied,502 U.S. 878 (1991). Although
generally we review a district court's award of attorneys' fees for an abuse of
-15- discretion, we review its application of the legal principles underlying the award
de novo. Harolds Stores, 82 F.3d at 1553.
Initially, we note T.A.O.'s second argument, that a finding of bad faith in a
Miller Act case does not warrant the charging of attorneys' fees, is patently
meritless. It is true the longstanding "American Rule," adopted by the Supreme
Court in Arcambel v. Wiseman, 3 U.S. (3 Dall.) 306 (1796), generally bars
prevailing parties from recovering attorneys' fees in the absence of a statute or
enforceable contract providing for such an award. E.g., Alyeska Pipeline Serv.
Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975); F.D. Rich, 417 U.S. at 126.
The rationale underlying this rule, which often operates to prevent full
compensation to injured parties, is that because "litigation is at best uncertain one
should not be penalized for merely defending or prosecuting a lawsuit, and that
the poor might be unjustly discouraged from instituting actions to vindicate their
rights if the penalty for losing included the fees of their opponents' counsel."
Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718 (1967).
However, "[t]he federal judiciary has recognized several exceptions to the general
principle that each party should bear the costs of its own legal representation."
F.D. Rich, 417 U.S. at 129. One such exception allows the courts the inherent
power to assess attorneys' fees when the losing party has "acted in bad faith,
-16- vexatiously, wantonly, or for oppressive reasons," id., which exception is
commonly referred to as the "bad-faith" exception to the American Rule. Indeed,
the Supreme Court has explicitly acknowledged the bad-faith exception in the
context of the Miller Act, see id. at 126-129, as have numerous circuit courts,
including our own. See, e.g., Western States, 834 F.2d at 1542-43; Tacon
Mechanical Contractors, Inc. v. Aetna Cas. & Surety Co., 65 F.3d 486, 489 (5th
Cir. 1995); United States ex rel.Yonker Constr. Co. v. Western Contracting Corp.,
935 F.2d 936, 942-43 (8th Cir. 1991); United States ex rel. Leno v. Summit
Constr. Co., 892 F.2d 788, 791 & n.3 (9th Cir. 1989).
Reaching T.A.O.'s third argument, we look to the source and purpose of the
bad-faith exception to determine its scope. The exception derives from the
inherent power of the federal courts to sanction conduct that abuses the judicial
process. See Chambers v. NASCO, Inc., 501 U.S. 32, 44-46 (1991). Thus, "[f]ees
awarded under the bad-faith exception are punitive in nature, but are designed to
punish the abuse of judicial process rather than the original wrong [underlying the
action]." Shimman v. International Union of Operating Eng'rs, 744 F.2d 1226,
1232 n.9 (6th Cir. 1984) (en banc), cert. denied, 469 U.S. 1215 (1985); accord
Guevara v. Maritime Overseas Corp., 59 F.3d 1496, 1502-03 (5th Cir. 1995) (en
banc), cert. denied, 116 S. Ct. 706 (1996). Because the origin of the bad-faith
-17- exception is the federal judiciary's necessary and inherent power to police
proceedings before it, see Chambers, 501 U.S. at 43, 46, we find it unlikely that
exception reaches to bad-faith conduct not occurring during the course of the
litigation itself.
The majority opinion in Chambers implicitly supports our position. The
Court premised its affirmation of a trial court's award of attorneys' fees for bad-
faith conduct on a finding that "the District Court did not attempt to sanction
petitioner for breach of contract, but rather imposed sanctions for the fraud he
perpetrated on the court and the bad faith he displayed toward both his adversary
and the court throughout the course of the litigation." Id. at 54. Although the
Court therefore declined to state an opinion "as to whether the District Court
would have had the inherent power to sanction [petitioner] for conduct relating to
the underlying breach of contract" because that issue was not before it, it
intimated such would not be that case: "the imposition of sanctions under the
bad-faith exception depends not on which party wins the lawsuit, but on how the
parties conduct themselves during the litigation." Id. at 53, 54 n.16 (emphasis
added).
-18- Moreover, the four dissenting Justices explicitly asserted the federal
judiciary's inherent power to sanction bad-faith conduct through the charging of
fees does not extend to bad faith in the conduct on which the suit is based. Their
dissents, to the extent relevant here, arose not from any disagreement over the
rule regarding attorneys' fees for bad-faith litigation conduct, but rather from their
opinion the district court had in actuality awarded attorneys' fees "for petitioner's
flagrant, bad-faith breach of contract," rather than solely for bad-faith litigation
conduct. Id. at 60, 72-73 (Scalia, Kennedy, JJ., dissenting). Justice Kennedy,
joined by Chief Justice Rehnquist and Justice Souter, stated:
it is impermissible to allow a District Court acting pursuant to its inherent authority to sanction such prelitigation primary conduct. A court's inherent authority extends only to remedy abuses of the judicial process....
....
When a federal court, through invocation of its inherent powers, sanctions a party for bad-faith prelitigation conduct, it goes well beyond the exception to the American Rule and violates the Rule's careful balance between open access to the federal court system and penalties for the willful abuse of it.
Id. at 74 (Kennedy, J., dissenting). Justice Scalia "emphatically agree[d] with
Justice Kennedy ... that the District Court ... had no power to impose any
sanctions for petitioner's flagrant, bad-faith breach of contract." Id. at 60 (Scalia,
J., dissenting). He further explained that the American Rule,
-19- "deeply rooted in our history and in congressional policy," prevents a court (without statutory authorization) from engaging in what might be termed substantive fee shifting, that is, fee shifting as part of the merits award. It does not in principle bar fee shifting as a sanction for procedural abuse.
Id. at 59 (Scalia, J., dissenting) (emphasis omitted) (quoting Alyeska Pipeline, 421
U.S. at 271).
We note our position is not a solitary one. Our sister circuits that have
squarely addressed this issue have also held the exception does not reach purely
prelitigation bad-faith conduct. 5 Lamb Eng'g, 103 F.3d at 1434-37; Galveston
County Navigation Dist, No. 1 v. Hopson Towing Co., 92 F.3d 353, 359 n.13 (5th
Cir. 1996) (citing Guevara, 59 F.3d 1496); Horizon Air, 976 F.2d at 548-50;
Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1014 (11th Cir. 1985);
Shimman, 744 F.2d at 1233; Nemeroff v. Abelson, 620 F.2d 339, 348 (2d Cir.
1980); see also 6 James Wm. Moore et al., Moore's Federal Practice ¶ 54.78[3], at
5 Although the Eighth and Ninth Circuits have propounded cases that could be construed as holding the exception to reach such conduct, see Association of Flight Attendants v. Horizon Air Indus., Inc., 976 F.2d 541, 548-49 & nn.10, 11 (9th Cir. 1992) (citing such cases); Yonker Constr., 935 F.2d at 942; Richardson v. Communications Workers of Am., 530 F.2d 126, 132-33 (8th Cir.), cert. denied, 429 U.S. 824 (1976), they have since retreated from that position. Lamb Eng'g & Constr. Co. v. Nebraska Public Power Dist., 103 F.3d 1422, 1435-36 & n.17 (8th Cir. 1997); Horizon Air, 976 F.2d at 549-50.
-20- 54-446 (2d ed. 1996) (stating the restrictive view we adopt to be the "better
supported" one). 6
In urging the exception is not limited to bad faith in the litigation setting,
Towerridge relies primarily on Vaughan v. Atkinson, 369 U.S. 527 (1962), a case
often cited as being the Court's initial declaration of the exception, see Shimman,
744 F.2d at 1229-30 (discussing development of bad-faith exception). 7 Vaughan
was a seaman's suit in admiralty against shipowners for maintenance and cure
6 We do not decide whether a court can consider prelitigation bad-faith conduct in deciding whether to award attorneys' fees under the bad-faith exception where litigation bad-faith conduct also exists; we merely hold the award of fees may not be premised solely upon prelitigation abusive conduct. See Lamb, 103 F.3d at 1435 (A "'court may consider conduct both during and prior to the litigation, although the award may not be based solely on the conduct that led to the substantive claim.'") (quoting McLarty v. United States, 6 F.3d 545 (8th Cir. 1993)); accord Horizon Air, 976 F.2d at 549-50; but see Chambers, 501 U.S. at 46 (noting "the inherent power [to impose sanctions for bad-faith conduct] extends to a full range of litigation abuses") (emphasis added); id. at 61 (Kennedy, J., dissenting) (asserting the Court's affirmation of the award of fees was erroneous because the district court sanctioned the defendant at least in part for his underlying bad-faith breach of contract) (emphasis added); Galveston County, 92 F.3d at 359 n.13 (concerned only with the defendants' alleged abuse of the litigation process and disregarding the nature of the underlying tort). 7 Towerridge fails to cite Hall v. Cole, 412 U.S. 1, 15 (1973), in which the Court stated "that 'bad faith' may be found, not only in the actions that led to the lawsuit, but also in the conduct of the litigation." In any event, we agree with the Sixth and Ninth Circuits that this statement, read in context, does not extend the bad-faith exception to prelitigation conduct. See Horizon Air, 976 F.2d at 549-50 & nn.13-14; Shimman, 744 F.2d at 1232-33.
-21- during the seaman's recuperation from an illness, and damages for their failure to
pay same. Vaughan, 369 U.S. at 527-28. Under clear and longstanding law, the
defendants had an unquestionable duty to supply such maintenance and cure while
the seaman was convalescing. See id. at 531. Nonetheless, they failed to do so:
[R]espondents were callous in their attitude, making no investigation of libellant's claim and by their silence neither admitting nor denying it. As a result of that recalcitrance, libellant was force to hire a lawyer and go to court to get what was plainly owed him under laws that are centuries old. The default was willful and persistent. It is difficult to imagine a clearer case of damages suffered for failure to pay maintenance than this one.
Id. at 530-31. The Supreme Court allowed the seaman to recover his reasonable
attorneys' fees. See id. at 529-30.
However, the theory upon which the Supreme Court awarded the fees is
unclear. See generally Guevara, 59 F.3d at 1501 (discussing alternative
rationales). Arguably, the Court punitively sanctioned the defendants for their
"callous," "recalcitrant," and "willful and persistent" refusal to pay a clearly owed
debt, and litigation of the same. See Vaughan, 369 U.S. at 530-31; see also, e.g.,
F.D. Rich, 417 U.S. at 129 & n.17 (citing Vaughan as authority for the bad-faith
exception to the American Rule). Alternatively, the award may have been a
compensatory one, premised upon the seaman's entitlement under admiralty law to
recovery of "necessary expenses" incurred in obtaining maintenance and cure.
-22- See id. at 531; see also Fleischmann Distilling, 386 U.S. at 718 (indicating
Vaughan was limited to calculating compensatory damages in admiralty cases).
In any event, careful examination of Vaughan through the lens of either
rationale belies Towerridge's reading of the case. Obviously, if the award was
compensatory it was not based upon bad faith and therefore Vaughan would be
irrelevant to the instant matter. Moreover, even if the award was a sanction
punishing defendants' bad-faith conduct, that bad faith lay in their "callous"
refusal to pay a debt "plainly owed [the plaintiff] under laws that are centuries
old," that is, their forcing the plaintiff to litigate though they lacked a colorable
defense. Shimman, 744 F.2d at 1230-31; Moore et al., supra, ¶ 54.78[3], at 54-
447. The Court did not affirm the award on the basis of bad-faith prelitigation
conduct. Indeed, the trial court specifically found the plaintiff's illness did not
result from negligence on the part of the defendants. Vaughan v. Atkinson, 291
F.2d 813 (4th Cir. 1961), rev'd on other grounds, 369 U.S. 527 (1962). Thus,
there could have been no bad-faith conduct unrelated to the litigation.
In distinguishing Vaughan from the instant case, it is helpful to categorize
and distinguish three forms of bad-faith conduct, one of which is not a basis for
fee shifting though the other two lie within the bad-faith exception to the
-23- American Rule. See generally Shimman, 744 F.2d at 1230-31 (delineating types
of bad faith). First, bad faith occurring during the course of litigation that is
abusive of the judicial process undisputably, at the discretion of the court,
warrants sanction through the charging of fees. Chambers, 501 U.S. 32. The
second category is "bad faith in bringing an action or in causing an action to be
brought." Shimman, 744 F.2d at 1230; see also, e.g., San Juan Prods., Inc. v. San
Juan Pools of Kan., Inc., 849 F.2d 468, 476 (10th Cir. 1988). Where a party
institutes an unfounded action wantonly or for oppressive reasons, or necessitates
an action be filed or defends an action through the assertion of a colorless
defense, that constitutes bad faith which is grounds for an award of attorneys'
fees. See Moore et al., supra, ¶ 54.78[3], at 54-440. However, this second form
of bad faith must be distinguished from the third category, bad faith in the acts
giving rise to the substantive claim. As discussed above, such bad faith does not
fall within the bad-faith exception. These distinctions are crucial to a proper
understanding of Vaughan. The shipowners' bad faith was of the second variety,
and therefore, assuming a punitive rationale, was grounds for fee shifting.
Because Vaughan did not involve the third, prelitigation, category of bad faith,
Towerridge's reliance upon it in contending the bad-faith exception reaches
prelitigation conduct is misplaced.
-24- In the instant case, the district court awarded Towerridge attorneys' fees
based upon its finding T.A.O.'s prelitigation conduct was in bad faith and
warranted fee shifting. The court stated:
Plaintiff does not base its claim of bad faith solely on TAO's failure to pay a legitimately disputed amount. Plaintiff presented additional evidence of bad faith including evidence that TAO (1) refused to pay Plaintiff amounts justly due and owing after representing on payment applications to the United States that such amounts were due and owing to Plaintiff; (2) interfered with and obstructed Plaintiff's ability to perform its work; (3) interfered with and ultimately retained the benefit of the subcontract between Plaintiff and [a subcontractor of Plaintiff's]; and (4) improperly off-set amounts justly due and owing to Plaintiff against the costs to complete the subcontract.
Even assuming all such actions occurred and were in bad faith, the bad faith was
not abusive of the judicial process; any bad faith lay solely in T.A.O.'s
prelitigation acts which gave rise to Towerridge's substantive claim. Thus, the
bad-faith conduct was not of either of the types which are within the scope of the
bad-faith exception. 8 Indeed, Towerridge states as much in its brief to this court:
"It is for pre-litigation bad faith that [Towerridge] makes its [bad-faith] exception
claim to attorney fees." Moreover, at oral argument, Towerridge admitted it was
not claiming T.A.O. exhibited bad faith during the course of the litigation.
8 To the extent the district court's award could be seen as based upon a bad faith refusal to pay by T.A.O. through the assertion of a colorless defense, we do not find such a view to be supported by the facts.
-25- Though statements in briefs or during oral argument are not necessarily binding
admissions, we may consider them as such at our discretion. Guidry v. Sheet
Metal Workers Int'l Ass'n, 10 F.3d 700, 716 (10th Cir. 1993), modified on other
grounds sub nom. Guidry v. Sheet Metal Workers Nat'l Pension Fund, 39 F.3d
1078 (10th Cir. 1994), cert. denied, 115 S. Ct. 1691 (1995). Here Towerridge's
statements simply further assure us any bad faith exhibited by T.A.O. was not of a
nature warranting fee shifting under the bad-faith exception.
As did Justice Kennedy in his dissent in Chambers, see 501 U.S. at 76, we
clarify that in no way do we condone any actions taken in bad faith by T.A.O.
Nonetheless, we refuse to approve fee shifting under the bad-faith exception
where the wrongful conduct consists solely of prelitigation bad-faith acts. Such
an expansion of the bad-faith exception risks swallowing of the Rule, see Jane P.
Mallor, Punitive Attorneys' Fees for Abuses of the Judicial System, 61 N.C. L.
Rev. 613, 634 (1983) (expanding the exception to include bad-faith conduct that
gives rise to a cause of action "could open the door to fee shifting in the ordinary
tort or contract case"), and is not warranted by the exception's purpose, nor
authorized by its source. Indeed, the Court has specifically warned not to
"undercut the application of the American Rule" in Miller Act suits, which are
"plain and simple commercial litigation." F.D. Rich, 417 U.S. at 130-31. We will
-26- not do so here by allowing what would in essence be the very substantive fee
shifting on the merits that the American Rule bars. See Chambers, 501 U.S. at
59, 74 (Scalia, Kennedy, JJ., dissenting). Accordingly, we reverse the district
court's award of attorneys' fees.
D. Admission of Settlement Evidence
T.A.O. objects to the district court's admission of evidence regarding a
separate action between T.A.O. and the government, and settlement thereof.
T.A.O. contends admission of the evidence violated Fed. R. Evid. 402, 403, and
408, warranting a mistrial. We review the trial court's admission of the evidence
and its rejection of T.A.O.'s motion for mistrial under an abuse of discretion
standard. United States v. Davis, 40 F.3d 1069, 1073, 1076, 1079 (10th Cir.
1994), cert. denied, 115 S. Ct. 1387 and 115 S. Ct. 1806 (1995); Broadcort
Capital Corp. v. Summa Med. Corp., 972 F.2d 1183, 1194 & n.15 (10th Cir.
1992).
The trial court allowed testimony establishing that T.A.O. submitted claims
to the government for damages caused by governmental delay and disruption of
the construction project, and that the government paid T.A.O. an undisclosed sum
of money in settlement of these claims. It also allowed testimony implying the
-27- government's delay and disruption of the project caused delay in Towerridge's
work. T.A.O. makes a three-fold argument that any evidence related to these
claims and their settlement was inadmissible.
First, T.A.O. argues admission of the evidence violated Fed. R. Evid. 402,
which bars admission of evidence that is not relevant. "'Relevant evidence' means
evidence having any tendency to make the existence of any fact that is of
consequence to the determination of the action more probable or less probable
than it would be without the evidence." Fed. R. Evid. 401. T.A.O. contends the
evidence was irrelevant to Towerridge's claim against it, which was for amounts
due and owing under the subcontract. However, T.A.O. asserted during the trial
that Towerridge's performance was inadequate because it was untimely, and that
delay by Towerridge was one of the reasons it hired supplemental contractors to
complete the work originally subcontracted to Towerridge. Thus, the evidence
was relevant to show delay in Towerridge's performance was the fault of the
government rather than Towerridge.
Second, T.A.O. claims admission of the evidence unfairly prejudiced
T.A.O. by implying T.A.O. was a "deep pocket" and unjustly withheld recovery
-28- from Towerridge to which Towerridge was entitled. 9 Fed. R. Evid. 403 bars the
admission of relevant evidence if its probative value is substantially outweighed
by a danger of unfair prejudice. After thorough review of the record, we cannot
say the district court abused its discretion in failing to hold Rule 403 prevented
admission of the controverted evidence.
Third, T.A.O. contends Fed. R. Evid. 408 barred admission of evidence
regarding the settlement. Rule 408 provides that
[e]vidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible.... This rule ... does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosection.
Rule 408 does not require the exclusion of evidence regarding the settlement of a
claim different from the one litigated, see Broadcort Capital, 972 F.2d at 1194,
though admission of such evidence may nonetheless implicate the same concerns
9 At oral argument, T.A.O. contended references to the separate action and settlement permeated the entire trial, causing T.A.O. irrevokable prejudice. Review of the trial transcript does not show such references to have been so pervasive.
-29- of prejudice and deterrence of settlements which underlie Rule 408, see Orth v.
Emerson Elec. Co., 980 F.2d 632, 639 (10th Cir. 1992). In any event, Rule 408
only bars admission of evidence relating to settlement discussions if that evidence
is offered to prove "liability for or invalidity of the claim or its amount," and the
evidence at issue here was not offered for that forbidden purpose. Rather,
Towerridge offered the evidence to show it was not at fault for any delay and to
show T.A.O. acted in bad faith. Accordingly, the district court did not abuse its
discretion in allowing the testimony at issue, nor did it abuse its discretion in
refusing T.A.O.'s request for a mistrial.
E. Towerridge's Cross-Appeal
As previously noted, in response to a special interrogatory the jury found
T.A.O. acted in bad faith. Towerridge cross-appeals the district court's failure to
include that finding in its entry of judgment. Because we reverse the district
court's award of attorneys' fees to Towerridge, which was the only element of
damages dependent on a finding T.A.O. acted in bad faith, we need not address
Towerridge's cross-appeal. See Griffin, 929 F.2d at 554.
AFFIRMED IN PART and REVERSED IN PART.
-30-