Dunn & Black, P.S., et al. v. United States of America

We must decide whether a law firm can bring an action
against the United States to recover attorney's fees from
monies that its client was awarded as a result of a settlement
with the Federal Highway Administration, but never received
because the Internal Revenue Service requested that payment
be withheld to offset unpaid tax liabilities.

I

The United States, through the Western Federal Lands
Highway Division of the Federal Highway Administration
("FHWA"), contracted with Environmental Reclamation, Inc.
("ERI") to work on the Warren Profile Gap Road Project
("Project") in south central Idaho. After the government terminated the contract for default, ERI engaged the law firm
Dunn & Black, P.S. ("Dunn & Black") to file an action in the
Court of Federal Claims to recover $1,724,296 in damages for
wrongful termination of the contract. The government
asserted a counterclaim for reprocurement costs in the amount
of $948,168.82.

Until November 20, 2002, Dunn & Black represented ERI
at an hourly rate on matters concerning the Project. At that
time, ERI owed Dunn & Black $137,682.33 for legal services
rendered on the Project and other legal matters. On November
20, Dunn & Black renegotiated its hourly fee agreement with
ERI, changing it to a contingency fee arrangement, which
provided that Dunn & Black "shall be entitled to the first
$137,682.33 of any recovery from any claims related to the
Project, . . . for [ERI's] debt on this and other matters." The
agreement further provided that Dunn & Black shall receive
compensation for "its future services regarding the claims
arising out of the Project" in the amount of 50% of any
remaining recovery. ERI remained responsible for all litigation
costs.

On March 30, 2004, the FHWA, without admitting liability,
settled the dispute with ERI, stipulating to entry of judgment
in favor of ERI for $450,000. On April 5, 2004, the Court of
Federal Claims entered a judgment against the government in
the amount of $450,000. Upon learning of the judgment, the
Internal Revenue Service ("IRS"), requested that the Secretary
of the Treasury withhold payment of the judgment for
setoff against ERI's unpaid tax liabilities. On May 5, 2004,
the government informed Dunn & Black that the IRS would
be making claims to the settlement funds as an intended offset
of the entire amount of the judgment based on an unrelated
tax debt purportedly owed by ERI. On the same day, Dunn &
Black served the government with a notice of attorney's lien.
On May 7, 2004, ERI terminated its attorney-client relationship
with Dunn & Black without paying any fees owed.

On June 3, 2004, the United States filed a civil action in the
district court to reduce ERI's federal tax assessments to judgment.
The government originally demanded $988,000 in
unpaid tax assessments, but amended the complaint to
demand only $567,304.85 for unpaid federal employment and
unemployment tax liabilities plus interest and certain penalties.
The district court entered judgment in the amount of
$609,079.96, upon the government's motion for default judgment
against ERI.

On June 30, 2004, Dunn & Black commenced the instant
action by filing a complaint for declaratory judgment in district
court against the United States and ERI. Dunn & Black
requested that the district court declare that its fees in the
amount of $361,037.20 were reasonable for the legal services
rendered. Furthermore, Dunn & Black requested that the district
court declare its attorney's lien superior to all subsequent
liens, claims, and interest in and to the judgment. Alternatively,
Dunn & Black requested that the district court declare
that the government's setoff constituted unjust enrichment
without fairly compensating the firm for services in creating
the judgment fund. Lastly, Dunn & Black requested that the
district court declare that the government's setoff was a violation
of a property interest in the contingent fee and therefore
an unlawful property taking without compensation and a violation
of due process. The government asserted in its answer
that ERI owed the IRS $987,839.84 as of April 30, 2004.

Dunn & Black filed a motion for summary judgment. The
district court entered an order and judgment in favor of the
government. See Dunn & Black, P.S. v. United States, 366 F.
Supp. 2d 1008 (E.D. Wash. 2005). The district court first held
that it had jurisdiction over Dunn & Black's claim pursuant
to 28 U.S.C. § 1346(a)(1). Dunn & Black, 366 F. Supp. 2d at
1022-23. Furthermore, the district court denied Dunn &
Black's motion for summary judgment and held that the government's
claim of setoff in the amount of $450,000 was appropriate pursuant to 31 U.S.C. § 3728. Dunn & Black, 366
F. Supp. 2d at 1032-36.

Dunn & Black timely appealed.1

* * *

The parties shall bear their own costs on appeal.

VACATED AND REMANDED.