RACE-87-003-AK
6-2600-1000-2
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA RACING COMMISSION
In the Matter of the ORDER DETERMINING
Occupational License ENTITLEMENT TO
of jack Haymes FEES AND EXPENSES
On October 2, 1987, Jack Haymes and Kathy W. Hutchinson d/b/a Hutchinson
Racing Stables applied to the undersigned for an award of $6,550.45 in
attorneys' fees and expenses pursuant to the Equal Access to Justice Act,
Minn. Stat. 3.761, et Seq. The Minnesota Racing Commission filed a response
and objection to the application. No actual in-person hearing has been held
in this matter. The record closed on December 16, 1987, upon receipt of the
final submission.
Appearing on behalf of the Applicants herein was Robert J. Hennessey, of
the firm of Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwestern
Financial Center, 7900 Xerxes Avenue South, Bloomington, Minnesota 55431.
Appearing on behalf of the Minnesota Racing Commission was Special Assistant
Attorney General Mary B. Magnuson, 200 Ford Building, 117 University Avenue,
St. Paul, Minnesota 55155. Based upon the record in the original contested
case and the filings in connection with the application for fees, the
Administrative Law Judge makes the following:
FINDINGS OF FACT
1. Kathy Walsh Hutchinson is licensed by the Minnesota Racing Commission
as an owner/trainer. She has been licensed since 1985. In addition to being
licensed in Minnesota, she is also currently licensed in California. She has
been involved with horse racing since 1947. As of December, 19B6, she
maintained 10 horses on the grounds of Santa Anita Park Racetrack in Arcadia,
California, in addition to whatever other horses she had here in Minnesota.
She employed three grooms, two hot walkers, an exercise boy, a blacksmith and
an assistant trainer. In addition to those employees, she also has retained
various outside contractors, notably veterinarians.
2. Jack D. Haymes was employed by Kathy Hutchinson as her assistant
trainer. He was first licensed by the Minnesota Racing Commission in 1986 as
Hutchinson's assistant trainer.
3. Both in theory and in practice, Hutchinson was Haymes' employer. She
directed his activities, particularly with regard to medication of horses.
She directed which horses would get which medications. Although Haymes was
the person who actually administered the medications, it was Hutchinson who
controlled those activities.
4. On September 12, the Board of Stewards suspended Jack Haymes for
30 days, fined him $500, and ordered him off all grounds controlled by the
Commission. On September 15, Haymes filed a Notice of Appeal and Request for
a Stay with the Commission. Haymes (and Hutchinson, who had been similarly
suspended and fined on August 28) appeared before a panel of the Commission on
September 23. In his Notice of Appeal, Haymes argued that there were serious
defects in the Commission's rules. That same argument was repeated to the
Commission panel on September 23. On October 10, 1986, the Commission issued
Statements of Charges, and subsequently issued Notices and Orders for Hearing
against both Hutchinson and Haymes in connection with alleged medications of
certain of Hutchinson's horses in violation of Commission rules.
5. As a result of the two contested cases being consolidated for
purposes of the hearing, the participants behaved as if Hutchinson had
intervened in the Haymes case, and Haymes had intervened in the Hutchinson
case. Attorneys for both were allowed to cross-examine witresses, and there
was never a distinction made between them. Hutchinson has agreed to pay the
bills for Haymes' litigation.
6. The charges against Haymes were amended so that at the time of the
administrative hearing commenced in December of 1986, he was charged with two
violations. First of all, Haymes was charged with permitting two horses to
race with medications in their systems and being responsible for positive test
samples pursuant to Minn. Rule pts. 7890.0130, subp. I and 7877.0170,
subp. 2 C(2). Secondly, Haymes was charged with failing to guard two horses
so as to prevent the administration of medication to them in violation of
Minn. Rule pt. 7877.0170, subp. 2 C(3).
7. Following an administrative hearing before the undersigned, and a
review by the Commission pursuant to Minn. Stat. 14.61 and 14.62, the
Commission dismissed all charges against Jack Haymes by its Order of
August 19, 1987.
8. There has not been any appeal from the Commission's Order dismissing
the charges against Haymes.
9. On October 2, 1987, Haymes and Hutchinson applied for an award of
attorneys' fees and expenses relating to the proceeding against Haymes.
Attached thereto was an affidavit from the attorney who represented Haymes,
Thomas F. Miley. The affidavit sets forth, in detail, fees for Miley and a
clerk, as well as expenses for copying and delivery charges. The attorney
fees are at the rate of $75 per hour, while the clerk's fees are at the rate
of $35 per hour. These fees relate to activities from September 11, 1986 to
September 30, 1987. They include various correspondence and meetings in
preparation of the September 15 Notice of Appeal and the hearing before the
Commission panel on September 23, 1986.
10. The violations herein were alleged to have occurred in August of
1986. In September, a panel of the Commission heard appeals from stewards
suspensions and fines, and stayed actions of the stewards pending its own
determination. In October of 1986, statements of charges were issued along
with notices and orders for hearing. The hearing was held in December of
1986, with a final session in February 1987. On March 16, 1987, a bill was
introduced in the Senate (S.F. 922) which was ultimately enacted and became
Laws of Minnesota 1987, chapter 69. On March 19, a companion bill was
introduced in the House. On March 23, the Commission published a proposed
rule revision in the State Register. The proposed rules amended many of the
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Commission's existing rules covering a variety of topics relating to wagering,
stabling, licensure, the stewards, and other Matters. Included in the rule
amendments, however, was an amendment which clarified the prohibition against
horses carrying foreign substances in their bodies during a race. This was an
amendment to Rule 7890.0110, which was one of the rules at issue in the
Hutchinson/Haymes contested case hearing. The rule amendments became
effective in June of 1987. See, 11 State Register 2201. In addition, Laws of
Minnesota 1987, ch. 69, approved on May 7, 1987 with an effective date of May
8, 1987, required the Commission to adopt rules prohibiting a horse from
carrying foreign substances in a race. Had that statute and that rule been in
effect at the time of the alleged violations, they would have had a
substantial impact upon the impact of the proceedings against Hutchinson and
Haymes. They contain the prohibition which the Commission advocated at the
contested case hearing.
11. The hearing, which took portions of four days, was primarily focused
upon expert testimony from veterinarians and academicians regarding the state
of current knowledge a bout inderal LA and its effect on hors es , particularly
how horses metabolize it. The parties were able to dispose of some
uncontroverted issues by stipulation and agreement. Both parties avoided
wasting time on uncontroverted matters and both proceeded in a professional
manner. Neither party engaged in conduct that unduly or unreasonably
protracted the final resolution of the matter.
Based upon the foregoing Findings, the Administrative Law Judge makes the
following:
CONCLUSIONS
1. That the Applicant herein has complied with all substantive and
procedural requirements of law or rule so as to establish that the
Administrative Law Judge does have jurisdiction in this matter. While the
application for fees was not filed within 40 days from the date of the
Commission's final disposition as required by Minn. Rule pt. 1400.8401,
subp. 3, there is no 40-day requirement in the statute. The rule cannot
remove jurisdiction from the ALJ or the agency. Leisure Hills of Grand
Rapids v. Levine, 366 N.W.2d 302 (Minn. App. 1985), rey. denied.
2. As a result of the consolidation, Hutchinson is deemed to be "a
person named or admitted as a party" in the Haymes case.
3. Haymes, individually, is not a "party" for purposes of the Equal
Access to Justice Act. He is not an unincorporated business within the
meaning of subpart 6(a), nor is he a partner, officer, shareholder, member, or
owner of one within the meaning of subdivision 6(b). Haymes, individually,
may not receive fees or expenses pursuant to the statute.
4. Hutchinson is the owner of an unincorporated business. She meets the
test for the number of employees and annual revenues set forth in Minn. Stat.
3.761, subd. 6(a).
5. The racing of horses was a business interest of Hutchinson, as
opposed to any personal interest within the meaning of Minn. Rule
pt. 1400.8401, subp. 3 A(l)(f). Hutchinson appeared as the owner of the
racing business.
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6. Hutchinson is liable to Haymes for the fees and expenses. Her
assumption of them is not a mere gratuity, but rather reflects an underlying
liability. The exception contained in Minn. Rule pt. 1400.8401,
subp. 3 (A)(1)(d) does not exempt Hutchinson.
7. The $75 per hour fee for the attorney, and $35 per hour fee for the
law clerk, as well as the expenses claimed, are all reasonable within the
meaning of Minn. Stat. 3.761, subd. 5 and Minn. Rule pt. 1400.8401,
subp. 2 B.
B. The position of the Racing Commission was substantially justified in
that it had a reasonable basis in law and fact up to the Commission panel's
meeting of September 23, at which point the Respondents' legal theory was
fully presented. There was always a reasonable factual basis for the
Commission's position. However, after the September 23 presentation, the
Commission no longer had a reasonable ' legal basis for continuing the
proceedings against Haymes. The Commission, therefore, was not substantially
justified in continuing the proceedings against Haymes after September 23.
9. Haymes was a prevailing party within the meaning of Minn. Rule
pt. 1400.8401, subp. 3 A(2).
10. The attached Memorandum is incorporated herein.
Based upon the foregoing, the Administrative Law Judge makes the following:
ORDER
That Kathy Hutchinson is entitled to an award of fees and expenses in the
amount of $4,614.70. This is the total of all attorneys' fees and expenses
incurred by Jack Haymes after September 23, 1986.
Dated this 15th day of January, 1988.
ALLAN W. KLEIN
Administrative Law Judge
NOTICE
Any party dissatisfied with this determination may petition for leave to
appeal to the Minnesota Court of Appeals pursuant to Minn. Stat. 3.764,
subd. 2.
MEMORANDUM
This is the first application for an award of fees and expenses incurred
in a contested case before the Office of Administrative Hearings pursuant to
the Equal Access to Justice Act. This particular case raises two issues which
deserve further explanation so that it is clear how they were decided. The
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first is whether or not Hutchinson qual if i es as a "party" so as to be eligible
to collect fees for Haymes under the statute. The second is whether or not
the State was "substantially justified" in proceeding against Haymes.
I.
Minn. Stat. 3.7b1, subd. 6, defines "party", in part, as follows:
(a) Except as modified by paragraph (b), "party" means a
person named or admitted as a party....... in a . . .
contested case proceeding.......... and who is:
(1) An unincorporated business, partnership, corpora-
tion, association, or organization, having not
more than 50 employees at the time the . .
contested case proceeding was initiated; and
(2) An unincorporated business, partnership, corpora-
tion, association, or organization whose annual
revenues did not exceed $4,000,000 at the time
the....... contested case proceeding was initiated.
(b) "Party" also includes a partner, officer, shareholder,
member or owner of an entity described in paragraph
(a), clauses (1) and (2).
The Act also gives the Office of Administrative Hearings rulemaking
authority to establish procedures for the submission and consideration of
applications for awards of fees and expenses in contested case proceedings.
Pursuant to that authority, the Office adopted a more definite definition of a
"party" in Minn. Rule pt. 1400.8401, subp. 3. That rule, in pertinent part,
provides as follows:
(1) In determining who is an eligible party, the Judge
shall consider the provisions of subpart 2, item C,
and the following:
(a) The annual revenues shall mean the party's annual
gross revenue.
(b) The annual revenue and the number of employees of
the applicant and all that's affiliated shall be
aggregated . . .
(c) * * *
(d) An applicant who participates in a contested case
on behalf of one or more other persons or entities
that would be ineligible is not itself eligible
for an award.
(e) * * *
(f) An applicant who appears individually as a part-
ner, officer, shareholder, member, or owner of an
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entity eligible under the provisions of Minnesota
Statutes, section 3.761, subd. 6, paragraph (a),
clauses (1) and (2) may only assert a claim to the
extent the entity which they own or control can
assert such claim and may not assert a claim if
the issues on which the applicant prevails are
related primarily to personal interests rather
than to business interests.
The application of these provisions to the case of Hutchinson and her
employee, Haymes, is ambiguous and doubtful. Based upon a review of the rule
and the statute, it was determined that the words were not explicit and free
from ambiguity and that, therefore, it was appropriate to consider legislative
history and other factors in attempting to effectuate the intention
of the Legislature. Minn. Stat. 645.1b.
The statute, alone, gives a clearer picture of Hutchinson's status than
does the statute combined with the rule. Under the statute, an owner of an
unincorporated business with fewer than 50 employees and annual revenues less
than $4,000,000 is deemed to be a "party" so long as the business is either
named or admitted as a party. A threshold question is whether or not the
business must be named, or merely the owner. A good example is that of
Hutchinson. Hutchinson did business in her own name, without any corporation
or other formal entity intervening. As such, she was an unincorporated
business.
The matter is substantially complicated, however, by the rule. The rule
adds two limitations to the statutory standard. The first is that an
applicant participating in a contested case on behalf of one or more other
persons or entities that would be ineligible is not itself eligible. To take
a clear example, assume that an individual is engaged in a contested case with
the State over the revocation of his driver's license. The revocation arises
out of a purely personal event, such as an implied consent revocation. Assume
further that the individual was the sole shareholder and officer of a
corporation. It would be improper for the corporation to attempt to get
involved in the revocation proceeding and then claim that it was entitled to
an award for fees and expenses. The provision, in subpart 3 A(l)(d) would
prevent that from happening. It states that an applicant (the corporation)
who participates in a contested case on behalf of another person or entity
that would be ineligible is not itself eligible. Since the individual would
be ineligible, the corporation must be ineligible as well.
A second provision in the rule which clouds the determination of whether
or not Hutchinson is an appropriate party for Haymes' fees is contained in
paragraph (f) of the same subpart 3. It provides that an applicant who
appears individually as an owner of an eligible entity may only assert a claim
to the extent that the entity which they control can assert such a claim, and
further that the applicant may not assert a claim if the issues are related
primarily to personal interests rather than to business interests. Again, an
example might be appropriate.
It is very clear from the legislative history surrounding the adoption of
the statute that the intent of the Legislature was to compensate small
businesses for court costs and attorneys' fees when they prevailed against the
State if the State's was not substantially justified. An example used during
a Senate Judiciary Committee hearing on February 24, 1986 was the following:
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Every once in a while you get a case where the agency has
the wrong person, and so you get a notice that you are not
in compliance, and let's just say this is A-Jax Cleaning
Company, okay, and A-Jax Cleaning Company gets this notice
and calls back and says, I'm not A-Jax Cleaning Company in
Brown County, I'm A-Jax Cleaning Company in Redwood County,
and you got the wrong person. And notwithstanding that the
agency knew or should have known that they got the wrong
person, they proceed to commence some disciplinary action.
I guess what I'm trying to say is that I think this would
be valuable in the case of what I consider administrative
screw-ups, where the time and hassle going into the defense
is going to be compensated by the State. I think it's a
good bill because in some of the complaints that you get
against government there will be some form of redress.
Statement of Senator Gene Merriam, included in partial transcript of
proceedings of Senate Judiciary Committee on February 24, 1986, as prepared by
the Administrative Law Committee of the Minnesota Attorney General's Office
and submitted on October 27, 1986 to Administrative Law Judge Melvin B.
Goldberg, as Ex. C, p. 2.
The example given by Senator Merriam is an obvious "screw-up". But the
Act was intended to cover less obvious situations. There is currently a
statute, Minn. Stat. 549.21, which allows for the award of costs,
disbursements and reasonable attorney's fees in the case of bad faith,
frivolous, delaying, harassing, or fraudulent claims. The EAJA was intended
to go beyond "bad faith" cases. As the primary sponsor of the Equal Access to
Justice Act stated, the bill is based upon the federal Equal Access to Justice
Law (28 U.S.C. 2412), which contains the phrase "substantially justified". In
testimony before the House Judiciary Committee on February 11, 1986 he
explained:
The "substantially justified" is the doctrine or the clause
which is sort of the key to the bill, and those who framed
this legislation originally in Washington tried to make it
into sort of a reasonableness standard that would sort of
cut down the middle between giving the small business a
reimbursement for court costs and attorneys' fees whenever
they prevail, and to automatically siding with the State,
only giving reimbursement when the State reacted in bad
faith. So it's sort of a reasonableness standard that
tries to cut down the middle.
Submission of Administrative Law Committee of the Minnesota Attorney General's
Office, Ex. A, p. 1., Testimony of Mike Hickey, representing the National
Federation of Independent Business. See also Ex. E, p. 1, distributed to the
Senate Judiciary Committee on February 17, 1986.
The federal Act defines "party" quite differently than the Minnesota law.
Put briefly, the federal definition is much simpler than the state's. Under
the federal law, 28 U.S.C. 2412 (d)(2)(B), "Party" means:
(i) an individual whose net worth did not exceed
$2,000,000 . . . or
any owner of an unincorporated business, or any
partnership, corporation . . . the net worth of which
did not exceed $7,000,000....... and which had not more
than 500 employees . . .
Explaining the difference, before the various committees of the Minnesota
Legislature, was a challenge for both Mr. Hickey and the legislative
sponsors. For example, before the House Judiciary Committee on February 11,
1986, the following colloquy occurred:
REPRESENTATIVE BISHOP: I looked through a previous draft
of this bill when it was before the House last year and
have read a lot of other material, and in each case I found
that while you've covered corporations and partnerships,
individuals who had exactly the same business coverage and
had over a million dollars of net worth . . . would have no
equal justice . . . . I knew some people who would be
covered because they were doing business as [Subchapter S]
corporations, whereas if they were doing business as
individuals with exactly the same business and same number
of employees and same number of net worth, they wouldn't.
Can you answer that part?
HICKEY: Glad to answer....... Representative Bishop. I
concur with your point on individuals. It would be nice to
cover them under the Act. We just feel, this year, with
the potential budgetary impact of the legislation and in
light of the situation here with the State budget, we'd be
better just to have small business owners covered. I think
the concept works just as well for individuals, too, but I
think the State's going to have a lot more exposure, and I
feel for individuals that are aggrieved by the State just
as I do for small business owners, but we just felt it
better to start off with a small undertaking and just cover
small business owners.
In the Senate Judiciary Committee on February 24, 1986, the following
occurred:
WILLET: As I indicated, the subcommittee did a substantial
amount of work on the original proposal and I believe has
fine-tuned it now to the extent that I believe it would
remove the possibility of frivolous cases. I think that
was the concern and nobody certainly wants that to hap-
pen . . . . Under subdivision 5, the parties eligible to
recover would include the sole owner of an unincorporated
business or other business entities with a maximal 50
employees. And that'S to keep it down to the small business
and that's the ones we are concerned about. Individuals,
an individual would not be eligible to recover. That was
handled by the subcommittee too because there was concern
about just having frivolous cases by individuals just
pouring into the court and that's not the intent of this
proposal . . . .
CHAIRMAN: Senator Willet, what's the justification for
doing this for small business but not for individuals who
might have problems with the State and end up winning their
case but having high attorney fees?
WILLET: Well, Mr. Chairman, the main thrust here, and I
suppose the argument there could be to include those, but
the main reason was, is there would be, and we couldn't
think of any cases where that would be the case. Most
cases would come in terms of safety regulations or environ-
mental questions with maybe developers or expanding
businesses. And the cases in terms of individuals would be
either slight or nonexistent that we could point to. There
may be some that I did not think about, but I couldn't put
my finger on any that would be substantial that you would
probably want to consider. And the concern by the subcom-
mittee was that they did not want to load up the docket
with just maybe some frivolous action in the court.
POGEMILLER: Mr. Chairman, Senator Sieloff, I am having
trouble following all this but are, have you in any way,
and I am just going to have to take your word for this,
have you in any way changed the criteria that the busi-
nesses that would be covered by this would be unincorporated
business with less than 50 employees and less than four
million in revenue?
SIFLOFF: No, I have only changed the standing to invoke
the Act by adding to that not only the business itself, the
corporation, but also the persons who, like the owner of
the corporation, the little corporation, or the member of
the nonprofit organization or somebody who is impacted,
because what happens in these things is that they are
dragged into these cases personally and should have
standing along with the entity itself.
POGEMILLER: Senator Sieloff, all of these changes you made
here, and again I haven't had time to go through them all,
in no way broadens coverage of this from the way it came
out of subcommittee?
SIELOFF: No. No. You still have to have no more than
50 employees or no more than $4 million. It's the same
standards.
COUNSEL: I think it substantively is the same. It takes
out the language talking about. It doesn't include a
person suing or being sued as an individual but I think
with the type, as you say, it has to be one or two and it's
the same standards. You know, under 50 employees or/and
under $4 million. That's the controlling language.
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When it came time to adopt the Office of Administrative Hearings' rule,
there was a great deal of comment on the proposed definition of a "party",
both at the rulemaking hearing, and in written submissions. The
Administrative Law Committee of the Minnesota Attorney General's Office was
particularly vigorous in urging a narrow construction of the Act, one that
would limit the amount of any claims paid out. On the other hand, licensed
professionals such as a medical doctor, a psychiatric institute, and attorneys
representing licensed professionals, urged a broad reading of the Act so that
they would be allowed to collect if they prevailed in disciplinary proceedings
and showed the State was not substantially justified. The Administrative Law
Judge who conducted that hearing recognized the problem and encouraged debate
and submission on it. He then prepared his Report, which described the
proposed definition of an eligible "party" as the rule which generated the
most comment. He noted the following:
The most troublesome argument raised by several parties in
oral and written testimony concerns the limitations that
must be put on the principle of including the licensed
professional within the coverage of EAJA. On the one hand,
there is the professional who has no employees and simply
bills for his time . . . who therefore meets any reasonable
definition of an "unincorporated business." On the other
hand, there is the licensed professional who must work for
another person or entity (the dental assistant who must
work under the supervision of a licensed dentist). The
latter person is clearly not included within the meaning of
the EAJA which is to apply only to an "unincorporated
business . . . [citing from the statute]."
The legislative history is not conclusive. There is a
clear legislative intent to limit the applicability of the
Act to small businesses, and not provide coverage to all
individuals who prevail in proceedings involving the
State. The limitation was made primarily to limit the
State's potential exposure. This is a reasonable limitation
given the Legislature's lack of experience with claims
under EAJA. However, the applicability of the term
"unincorporated business" to the professionally-licensed,
sole practitioner was not directly addressed by the
Legislature (at least as evidenced by the materials
submitted in this proceeding).
The OAH takes the position that if an applicant for fees
can establish that he/she is a "Person" that meets the
unincorporated business definition of subd. 6, as well as
the rest of the Act, then he/she is a party entitled to
compensation. That position is reasonable given the
legislation . . . . There are many arguments that can be
advanced for distinguishing between the self-employeed
licensee and the employee-licensee. There may also be
situations where a professional licensee cannot meet the
definition of an unincorporated business. These arguments
are best made on an individual basis to an administrative
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law judge or a court. To avoid excessive litigation the
Legislature may wish to clarify the EAJA. The OAH rules
are the best that can be drafted under the existing
legislation given the variety of factual circumstances that
must be covered.
The position adopted by the Administrative Law Judge in approving the
proposed rules is essentially the same conclusion as was reached by the
Attorney General's Administrative Law Committee. In its initial post-hearing
submission, the Committee recognized that the distinction between a business
and an individual created a problem, and urged the Administrative Law Judge to
avoid deciding it one way or the other. The Committee stated:
The rules which are proposed do not specifically bar EAJA
claims by licensees who have been involved in disciplinary
proceedings. If licensees who are involved in such cases
wish to assert claims under EAJA, they are free to do so.
If such claims are filed, the parties can then litigate the
issue of the applicability of EAJA to that specific
licensee and proceeding. This is clearly the best means by
which to resolve these difficult issues. The question of
whether . . . any particular person is an "unincorporated
business," is best resolved in the context of a concrete
factual situation which has been proven in a contested case
hearing, not in the abstract setting of a rulemaking
proceeding.
A review of the legislative history of both the statutory adoption and the
rulemaking hearing convinces me that the distinction between a business and an
individual was intended to be a distinction based upon the type of activity
that was at issue. If it was a business activity, it is covered by the
statute, but if it is a purely personal activity, then it is not. The
distinction will be difficult to draw in some cases, but it is exactly the
kind of distinction that must be drawn by taxpayers, tax advisors and tax
collectors every day when taxpayers attempt to deduct the cost of hobbies,
claiming that they are really businesses. Based upon all the facts and
circumstances, a decision must be made as to whether the activities engaged in
are primarily for profit, or primarily for pleasure. That is the distinction
that was intended to be drawn in the EAJA by the Legislature. The rule
adopted by the Office is ambiguous, and Administrative Law Judge Goldberg
candidly acknowledged the ambiguity and acknowledged his willingness to defer
resolution of the problem to later case-by-case determinations in the context
of concrete fact situations.
It is unquestioned that the horseracing business, at least as practiced by
Kathy Hutchinson, was a business. It was not a hobby or a personal interest.
It was how she made her livelihood, and was clearly a profit-oriented
operation. Based on the analysis set forth above, it is concluded that the
horseracing business of Kathy Hutchinson qualifies as an "unincorporated
business" that was intended to be covered under EAJA to the same extent as if
she had incorporated it.
A more difficult question arises, however, out of the fact that the
expenses and attorneys' fees were incurred to defend Jack Haymes, not Kathy
Hutchinson. Haymes was clearly an employee of Hutchinson, but was also
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licensed separately. The applicable rule of the Racing Commission required
that assistant trainers must be employed by a licensed trainer. Minn. Rule
pt. 7877.0130, subp. 3 C. The immediate analogy is that of a dentist and a
dental assistant, as proposed by Administrative Law Judge Goldberg, who stated
in his Report that the dental assistant is clearly not included within the
meaning of an "unincorporated business". However, it is believed that Judge
Goldberg was referring to a dental assistant who was charged with some
wrongdoing that had nothing to do with the dentist. For example, a dental
assistant who is employed by a dentist and who assaults a patient and is
subject to a license revocation proceeding is involved in that proceeding as a
result of his or her own intentional act that (presumably) was not directed,
authorized or condoned by the licensed dentist. It was beyond the scope of
her employment. If the dental assistant were fined $500 by the licensing
board, clearly the licensed dentist would have no responsibility to pay that
fine on behalf of the assistant. It is the assistant who was responsible for
the assault, and who must pay the fine. The assistant is not an
"unincorporated business", and thus would not be eligible to recover under the
Act.
On the other hand, however, what of the dental assistant who is merely
following the orders of the employer, the licensed dentist, without any intent
or knowledge of wrongdoing, but who still becomes embroiled in a disciplinary
proceeding? Assume that the licensed dentist directed the assistant to take
certain actions which both believed were perfectly legal and appropriate.
Does that change the outcome of the EAJA's applicability?
The general rule, both in Minnesota and elsewhere, is that a principal
must reimburse an agent for the necessary costs of litigation, including
attorneys' fees, brought against the agent by third persons because of the
agent's acts done in the furtherance of the agency business. 3 C.J.S.,
Agency 322.
A principal is subject to a duty to exonerate an agent who
is not barred by the illegality of his conduct to indemnify
him for expenses of defending actions by third persons
brought because of the agent's authorized conduct, such
actions being unfounded but not brought in bad faith . . . .
Restatement_2d _of Agency, 439. The economic rationale for this common-law
rule was set forth by Judge Learned Hand in Admiral Oriental Lines v. United
States, 86 F.2d 201 (2d Cir. 1936) as:
The venture is the principals as the profits will be
his. So should the expenses. Since by hypothesis the
agent's outlay is not due to his mismanagement, it should
be regarded only as a loss, unexpected it is true, but
inextricably interwoven with the enterprise."
86 F.2d at 202. In other words, the principal must bear the costs of
litigation, even the agent's separate costs of litigation, just as the
principal must bear other costs of the business.
A variant on the standard occurs, however, when both the principal and the
agent are sued together. In such a case, if the principal retains competent
attorneys to defend the action against both the principal and the agent, the
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agent may not be reimbursed for the cost of independent attorneys, so long as
there were no antagonistic defenses requiring separate representation, and the
principal's attorneys were adequately defending the agent. For example, in
the c ase of Adams v. North Range Iron-Co., 191 Minn. 55, 253 N. W. 3 (1934), a
corporation owned a mining lease on land in Crow Wing County. Plaintiff Adams
was hired as the corporation's managing officer. The corporation sublet the
leased land to a third party to mine ore upon it. In negotiating the
sublease, Plaintiff Adams acted for the corporation, with the knowledge and
approval of its board of directors. Later, the sublessee sued the company,
Adams, and the two co-owners of the company, charging that it had been
fraudulently induced to sublease the land. The company employed attorneys to
defend the lawsuit on behalf of all of the defendants. The sublessee obtained
a verdict against the company and Adams for a great deal of money. Adams
happened to own substantial assets of his own, and feared that if the company
could not pay the judgment, he would be forced to. He elected to consult
other attorneys and employed them to appeal the judgment. Adams' attorneys
and the company's attorneys worked together and prepared a joint appeal
brief. They obtained a reversal of the judgment in the Circuit Court of
Appeals. Adams then sought indemnification from the company for his
attorneys' fees and expenses. The company denied the claim and Adams sued.
The trial court found for the company, and Adams appealed to the Minnesota
Supreme Court. The Minnesota Supreme Court affirmed the trial court, on the
ground that the company had performed its obligation to Adams by hiring
competent counsel to represent both it and him. The court stated that Adams
was the sole officer of the company, and if there had been any
misrepresentation made during negotiations, the misrepresentation was made by
Adams. There was no allegation that any other person participated in the
negotiations, or that the company did anything to expose itself to liability
other than what was done through Adams. The Court said there were no facts to
base a claim of a divergence of interests or antagonistic positions between
the two. The court was satisfied that under the facts of the case, both Adams
and the company would either stand or fall together. The Supreme Court held
that Adams was not entitled to reimbursement for the fees of his separate
attorneys.
In the Admiral Oriental Lines case, supra, judge Hand stated that where
the principal and' agent are both-sued and where the agent had a different
interest to protect that was not necessarily coincident with the principal's,
then the agent is entitled to defend its separate interest with separate
attorneys and is also entitled to indemnification from the principal for those
attorneys' fees.
A more recent case analyzing both the Adams and Admiral Oriental cases
stated the rule thusly:
Together, these cases stand for the proposition that where
the principal defends itself, the agent is not eligible for
indemnification unless the principal's defense leaves the
agent's interests unprotected.
Basmajian v. Christie, Manson & Woods, 629 F. Supp. 995 (S.D.N.Y. 1986).
In the case of Hutchinson and Haymes, different attorneys were used
because of the potential for a conflict or divergence of interests between the
two. Although that divergence never ripened into open disagreement or an
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adversary relationship, Haymes was separately represented because Hutchinson's
attorneys could not defend his interests if they came into conflict with
Hutchinson's interests. Under such a scenario, the case law holds that Haymes
is entitled to reimbursement for his reasonable attorneys' fees by
Hutchinson's business. Contrary to the Commission's Memorandum in Response
and Objecting to Application for Expenses and Attorney Fees, Hutchinson's
payment was not a "gratuitous gesture". So long as they had divergent
interests warranting separate attorneys, she was obligated to reimburse Haymes
for reasonable costs of defense, including attorneys' fees.
II.
The rules adopted to implement the Equal Access to Justice Act specify, in
a number of places, that a prevailing party is not entitled to reimbursement
solely because the agency did not prevail in the contested case. See Minn.
Rule pt. 1400.8401, subp. 3 A(2)(c) and subp. 3 C. Compensation is limited to
those cases where the applicant shows that the State's position was not
"substantially justified", meaning that it did not have a reasonable basis in
law and fact, based on the totality of the circumstances prior to and during
the contested case proceeding.
It is concluded that prior to the September 23, 1986 Commission hearing,
the Commission was proceeding on a reasonable basis -- that the horses had
been given medication, that they had raced with medication in their systems,
and that numerous rules had been violated by Hutchinson, Haymes, or both. But
after the filing of the September 15 Notice of Appeal and after the
September 23 presentation to the Commission panel, the Commission did not have
a reasonable legal basis for continuing to proceed against Haymes. After that
date, the Commission's position was not "substantially justified".
Ill.
As noted in Conclusion 1, there is a question regarding the validity of
the Office's rule setting a 40-day time limit for the filing of an application
for fees.
The rule at issue, Minn. Rule pt. 1400.8401, subp. 3, provides that the
application must be filed within 40 days of an agency's final decision.
In this case, the Commission's final decision was issued on August 19.
The application for fees was filed on October 2, which is 44 days later.
In the case of Leisure Hills of Grand Rapids v.Levine, 366 N.W.2d 302
(Minn. App. 1985), rev. denied, the Court held at a similar rule was invalid
to limit the jurisdiction of an agency because the time limit for filing an
appeal was not in a statute -- it was only in a rule. The Court reasoned that
the limits of the Agency's jurisdiction had to be set by the Legislature, and
that the Agency could not limit its own jurisdiction by rule.
The same factual situation exists here -- there is no time limit in the
statute. The 40-day limit is only in a rule. The rule, therefore, is
ineffective to bar this claim.
A. W. K.
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