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Cobell v. Kempthorne

August 7, 2008


The opinion of the court was delivered by: James Robertson, United States District Judge


In January 2008, I found that the government had not succeeded in providing the accounting mandated by the Indian Trust Fund Management Reform Act, and that the record demonstrated the impossibility of rendering such an accounting. Cobell v. Kempthorne, 532 F. Supp. 2d 37 (D.D.C. 2008) (Cobell XX). On the basis of that ruling, plaintiffs ask for equitable relief in the nature of restitution, seeking the return of funds that have been received into the IIM trust in the years since 1887 but cannot now be proven to have been disbursed or credited to IIM account holders, plus an amount representing the benefit the government has assertedly enjoyed from having the use of those funds. See [Dkt. 3515]. An evidentiary proceeding was convened on June 9, 2008, for the purpose of considering whether such relief was warranted, and, if so, determining its dollar amount.

Plaintiffs' claims for withheld funds and for an amount representing "benefit to the government" raise significant jurisdictional and other legal issues. Those issues were briefed by the parties before the June trial, see Plaintiffs' Memorandum in Support of Equitable Restitution and Disgorgement, [Dkt. 3515]; Defendants' Response to Plaintiffs' Memorandum in Support of Equitable Restitution and Disgorgement, [Dkt. 3519], but I deferred ruling on them in the belief that they would be illuminated by evidence adduced at the trial. [Dkt. 3526]. At the trial, the government sought to explain the difference between IIM trust receipts and IIM trust postings noted in my January 2008 opinion, see 532 F. Supp. 2d at 85-86, and both sides presented models for estimating the amount of money withheld from, or not disbursed to, IIM account holders over the years. Evaluation of those models, and of the plaintiffs' legal theories for recovery, is the principal focus of this memorandum.

Although the case no longer directly concerns the accounting question that dominated the first twelve years of its existence, the evaluation of the plaintiffs' legal theories for recovery is necessarily influenced by what we have learned from the government's failed effort to produce an accounting and from the many round trips the case has taken to the Court of Appeals. It is clear now that this Court has broad equitable authority to deal with a century or more of trustee nonfeasance and to fashion appropriate remedies, see Cobell v. Norton, 240 F.3d 1081, 1108-10 (D.C. Cir. 2001) (Cobell VI), but it is also clear that that authority is constrained by traditional doctrinal limits on federal courts that apply in suits against the government, including sovereign immunity and separation of powers. See Cobell v. Norton, 392 F.3d 461, 473 (D.C. Cir. 2004) (Cobell XIII). It is clear that the duties of the trustee and the principles of equity that govern failures to account are derived from statutes as informed by common law principles of trust, see Cobell VI, 240 F.3d at 1098-1102, but it is also clear that those statutory and common law principles are tempered by the unique nature of the trust and of the trustee. See Cobell v. Norton, 428 F.3d 1070, 1075-76 (D.C. Cir. 2005) (Cobell XVII). Accordingly, methods that might be unacceptable in a typical trust case, such as statistical sampling, are available here, where I am instructed to strike a more forgiving "balance between exactitude and cost." Id. at 1076; see also id. at 1077-79 (discussing statistical sampling). In these uncharted waters, where the trust is of enormous scope, the trustee of unusual character, and the data affected with such great uncertainty, the law of trusts is a sort of magnetic compass; it cannot be expected to point to due north, or to "map directly" onto this context. Id. at 1078.

One useful if not very precise pointer provided by case law is that a trustee may not hide behind obscurity that he himself has created. See, e.g., Rainbolt v. Johnson, 669 F.2d 767, 769 (D.C. Cir. 1981) ("Under established principles of trust law, if the former trustee has not kept adequate accounts, the benefit of the doubt is to be given to the beneficiary."); GEORGE GLEASON BOGERT, ET AL., THE LAW OF TRUSTS AND TRUSTEES § 962 (2007) ("As to a trustee who fails to keep proper records of his trust it is usually stated that, 'all presumptions are against him' on his accounting, or that 'all doubts on the accounting are resolved against him.'"). Thus, a consequence of the government's failure to account is that evidentiary presumptions run in favor of the plaintiffs.

But even this principle, like the trust duties themselves, requires compass correction in the context of this suit. The rules that identify and govern a breach of the accounting duty for a simple, 25-year trust with a single beneficiary cannot be applied, unaltered, to a 121-year old perpetual trust, managed by civil servants, with rapidly multiplying beneficiaries and a variety of ever-changing assets. Equity seeks "to do justice to all parties," Bollinger & Boyd Barge Serv., Inc. v. The Motor Vessel, Captain Claude Bass, 576 F.2d 595, 598 (5th Cir. 1978) (emphasis added) --- "its orders are adapted to the exigencies of the case," Taylor v. Sterrett, 499 F.2d 367, 368 (5th Cir. 1974), and it seeks to make accurate evaluations of difficult evidence, not to provide "windfalls" for victims or punishment for wrongdoers. See Bollinger & Boyd, 576 F.2d at 598. The application of familiar equitable principles will have to be made fairly to fit the special character of this case and this trust.

My conclusions, after attempting to apply a suitably adjusted set of equitable principles to the facts of this case, are that plaintiffs have properly asserted a claim for restitution; that this Court has both the jurisdiction and the power to adjudicate that claim; and that the evidence supports an award in the amount of $455,600,000, a number that is within the range of the government's own admitted "uncertainty" about the amount necessary to restore the proper balance to the IIM trust. I have rejected the plaintiffs' claim of entitlement to an additional sum representing "benefit to the government."

This opinion --- indeed, this litigation --- neither deals with nor resolves any claims that IIM account holders may have for damages against the government.*fn1 And it leaves for another day the question of how and to whom the award should be distributed.

I. Starting Point

Two important exhibits received at the October 2007 trial, AR-171 and DX-365, appeared to show that only 77 percent of the dollars collected on behalf of individual Indians over the years had actually been posted to IIM accounts, and that, over those years, the difference amounted to a shortfall of some $3 billion. See Cobell XX, 532 F. Supp. 2d at 85--86. I did not believe this to be the intended import of these exhibits, and I said so, noting the government's mention of the role of lease deposits and other non-individual monies in the system, id. at 86, but also noting that the parties had paid only "desultory" attention to the "throughput" question I had posed at the beginning of the trial. Id. at 82. The government made it clear at the outset of the June 2008 trial that indeed it had not intended to communicate the existence of a $3 billion shortfall.

The government's task of estimating and explaining the actual shortfall was complicated, however, by the fact that it could not produce an individualized accounting and by the paucity of existing aggregate data about the IIM trust. Tr. 500:19-501:16 (Herman) (acknowledging the Court's request for an explanation of the shortfall between receipts and postings, and attributing the difficulty to the lack of aggregate data). The government's explanation at the June 2008 trial was, essentially, that receipts recorded in the IIM system include monies not intended for IIM accounts, but the government also conceded that, without transaction-by-transaction accounting, there is essentially no way to distinguish IIM transactions from non-individual transactions. Id. There is some historical data regarding total receipts and disbursements in the early years of the trust, but "for the most part aggregate receipt and disbursement records on IIM weren't kept." Tr. 784:3-5 (Angel). For many years during the early period of the trust, there is no receipt and disbursement data at all. See DX-461.

Moreover, considerable evidence has been collected over the long life of this litigation, and more was adduced at the June 2008 trial, detailing the various ways in which trust systems purporting to contain receipt and disbursement data have been and still are unreliable, from qualified audits, Tr. 392:10 et seq. (Pallais), to a 73-page compendium of critiques and negative comments by politicians and auditors, each one hyperlinked to an historical document. PX-65.*fn2 There was also the out-of-balance condition between Interior and Treasury records, see Cobell XX, 532 F. Supp. 2d at 74-75, which lent credence to the possibility that substantial funds had gone missing over the life of the trust.

II. The "IIM System"

The framework for the government's presentation was its description of how funds move into, out of, around, and through what was described as the "IIM system." DX-370; Tr. 463:1-492:11 (Herman). Michelle Herman was the government's principal witness on the flow of IIM funds, at least for the more recent era beginning in approximately 1972. The notion of an "IIM system" was her own construct: a kind of botanical description of the information systems and accounts she has observed and studied over a career of working with the Indian trust. Tr. 571:8-22 (Herman). In fact, many of the labels she used in describing the system are not actually used in the system, nor is the very notion of a system itself. Tr. 647:17-648:7 (Herman).

Both parties nevertheless resorted to the term "IIM system" throughout the trial, using it to refer to the interlocking series of accounts, bookkeeping entries, and other data sets, used by the Department of Treasury and the Department of Interior to collect, hold, invest, track, and disburse IIM trust funds. It is a subset of a larger Indian trust "system," which also includes the tribal trust accounts. Modern information systems, including the Integrated Records Management System (IRMS) and the more recent Trust Funds Accounting System (TFAS), are described at length in Cobell XX. See 532 F. Supp. 2d at 43-44. Other components of the system, such as the general and detailed ledgers that were maintained by the Bureau of Indian Affairs and its various agencies and area-level offices before IRMS, have received less attention --- except for the repeated finding that the general ledger does not reconcile with either the subsidiary BIA ledgers or the Treasury ledger. See Cobell XX, 532 F. Supp. 2d at 74-75.

Today, receipts that the government collects in its capacity as trustee for individual Indians are posted to the 14X-6039 account at Treasury. See PX-65, hyperlink at ¶ 84, Dep't of Interior, Audit Report to the Congress of the United States, D084-0005 to 0006 (November 1955) ("Collections made by the Bureau on behalf of these Indians are deposited into the Treasury of the United States in deposit account 14X6039, Individual Indian Money."). When disbursements are made from the 14X-6039 account in the form of Treasury checks --- as opposed to bookkeeping transfers or electronic funds transfers --- they are tagged with Agency Location Code (ALC) 4844. Tr. 569:7-11 (Herman) (ALC 4844 relates to the IIM system). The 14X-6039 account exists within the Treasury General Count (TGA), so that, in the modern world, at least, cash posted to 14X-6039 becomes an asset of the government. But the balance of that account represents an offsetting liability of the government, much like a checking account at a bank. Tr. 213:20-214:18 (Miller) (distinguishing cash and funds in the 14X-6039 account).

Interior is responsible for the subsidiary accounts (and sometimes just bookkeeping entries) that are recognized as part of the IIM system -- from which and to which the funds in the 14X-6039 account flow. These include the IIM accounts themselves; Special Deposit Accounts (SDAs), which are used to temporarily store unallocated funds; so-called Tribal IIM accounts (IIM accounts that actually belong to tribes but are used by those tribes as a convenient checking system); and administrative accounts or account numbers used to record the collection of fees and the like. These SDA, Tribal IIM and administrative accounts and entries might be referred to as non-individual components of the IIM system. They hold or record funds which are collected in the government's capacity as trustee but may not be owed to or intended for IIM beneficiaries. For example, an SDA might contain a deposit made by a leaseholder or a bidder that will eventually be returned, or money that is destined for a tribal trust account rather than an IIM account. In short, the "IIM system" that the government has been trying to explain and account for includes the IIM accounts. See generally infra, Section IV.A. It receives, holds, transfers, disburses and records money that is associated with the government's role as trustee for IIM account holders, but which, by design, may never arrive in an Individual Indian Money account.

III. Plaintiffs' Model*fn3

Plaintiffs support their claim for an award of about $47 billion (restitution plus benefit to the government) with a model that rests upon the legal premise that any government data regarding IIM receipts should be treated as an admission, while only negotiated checks or other irrefutable evidence can be probative of disbursements. The plaintiffs' model thus accepts the government's estimates of receipts from the October 2007 trial, together with other government receipt data, see PX-41 at n.1; PX-189-A at n.1, but uses its own method to calculate year-by-year disbursements from the trust.

III.A. Description of Plaintiffs' model

Plaintiffs' model begins with a calculated "disbursement rate" which is arrived at by simple division: the numerator is the value of electronic fund transfers and checks that were sent to (and cashed by) beneficiaries during the years 1988-2002, and the denominator is the total receipts for those years. See Tr. 1481:1-1493:22 (Palmer); PX-189-C (disbursement rate calculation). That disbursement rate is then applied to whatever government receipts data and estimates that can be found for all of the years of the trust dating back to 1887. See PX-41; PX-189-A.*fn4 The process yields a spreadsheet which contains, for each year, a dollar amount for receipts, a calculated dollar amount for disbursements (receipts x disbursement rate), and a number that represents the difference between receipts and disbursements. Plaintiffs call these columns "corrected revenues," PX-189-A at Column E, "disbursements," id. at Column F, and "nominal benefit to government," id. at Column G. Column G sums to approximately $4 billion in plaintiffs' rebuttal model and is asserted to be the total dollar amount of funds withheld by the government over a period of 120 years --- a number, which, after subtracting the current stated balance of the trust, leaves approximately $3.6 billion that, in plaintiffs' submission, must be restored to plaintiffs' accounts.

Plaintiffs use the same model to calculate the benefit that they assert the government has enjoyed from not having to borrow and pay the 10-year bond rate on the annual, and accruing, "nominal benefit" amounts. The method is best described by example. In 1887, the first year of the trust, the government had not yet withheld any money from IIM accounts. Thus, the entire benefit to the government in that year is the nominal benefit in Column G. Compare PX-189-A, at Column G, FY 1887, with id. at Column J, FY 1887. The next year, 1888, the government accrues additional nominal benefit based on the difference between receipts and disbursements in that year.

See PX-189-A at Column G, FY 1888. But plaintiffs then add to the 1888 nominal benefit an amount representing the value to the government of holding the 1887 benefit --- not having to borrow that amount at the 10-year bond rate, see PX-189-A at Column I, FY 1888. This sum, plus the nominal benefit for 1888, plus the balance carried forward from 1887, is called the "accumulated benefit, end of year." See PX-189-A at Column J, FY 1888. The same operation is carried forward from year to year until 2007, by which time, in plaintiffs' rebuttal model, the accumulated benefit has grown to approximately $47 billion. The existing balance of the IIM trust accounts is deducted at the end. See generally, Tr. 268:2-272:11 (Cornell) (describing operation of the model). The plaintiffs' model is excerpted below:

Fiscal YearCorrected RevenuesDisbursementsNominal Benefit to the Government (E-F)10 yr. Treasury Bond RateAccrued Benefit (J*H)Accum. Benefit (J G I)  EFGHIJ 1887$560,000$440,000$130,0003.52%$130,000 1888$1,070,000$830,000$240,0003.67%$380,000 2007$316,000,000$238,180,000$77,810,0004.76%$2.1445 Billion$47.2749 Billion

As noted, the annual "nominal benefit" number in this model is driven by plaintiffs' "disbursement rate," which is not and does not pretend to be actual disbursements, but is rather a calculated factor that is itself driven by the plaintiffs' legal theory about proper evidence of receipts and disbursements. See PX-189-A at n.4 (describing disbursement calculations).*fn5 The only disbursement data whose accuracy plaintiffs were willing to acknowledge were 1988-2002 Electronic Fund Transfers and Automated Clearinghouse payments (EFT/ACH) and numbers from the Check Payment Reconciliation System (CP&R). See Tr. 1481:5-12 (Palmer).

Even the CP&R check data were discounted, according to plaintiffs' own estimate of the value of checks that were never negotiated (because the value of checks that were never cashed was presumed to have remained in the Treasury). See PX-189-C at Column C & n.5; Tr. 1482:5-22 (Palmer). Plaintiffs first compared the number of checks cashed to the number of checks that had been cut, see PX-56 at Column E --- the percentage was calculated to be 93.75 percent --- and simply assumed that this ratio could be used to calculate the dollar value of negotiated CP&R disbursements, despite the obvious likelihood that it would be the lower value checks that tended not to be deposited. Tr. 310:22-311:11 (Cornell). In their rebuttal model, plaintiffs purported to correct this obvious mistake, now comparing the dollar value of checks negotiated with the dollar value of checks cut. But the resulting ratio of 93.68 percent -- remarkably similar to the first one --- is derived from only a single year of data,*fn6 and it disregards government data from the same document that shows that cancelled check values are only about two percent of total check values, see DX-236 at 2 (compare "checks" and "stppay" for 2003). It appears, indeed, that the dollar value of checks returned to Treasury or cancelled because they are not cashed in a timely fashion is less than one percent of the total value of checks cut. See, e.g., DX-236 at 1 (value of cancelled checks was 0.02 percent of total check value for FY 1999); DX-242 at 17 (in a representative study, value of uncashed checks was 0.17 percent of total check values); DX-275 (value of checks cancelled for limited payability were less than 0.2 percent of total check value for same period).

III.B. Evaluation of Plaintiffs' Model

Plaintiffs' model suffers from numerous methodological flaws that were illuminated by the government's presentation and, in many instances, are obvious to anyone having basic familiarity with the case.

The most obvious flaw, perhaps, is that the size of plaintiff's calculated shortfall --- $4 billion, out of total receipts of about $14 billion, see PX-189-A at Column B --- is uncorroborated by any other event or data. Yes, the United States Government spills billions of dollars a year, loses money to fraud, waste, and abuse, and generally mismanages its affairs. But the Indian trust has been repeatedly audited, and while each of those audits has been qualified, see Cobell XX, 532 F. Supp. 2d at 54 (discussing meaning of the many qualified audits), no audit report states or hints at the disappearance of anything close to 30 percent of trust receipts. Plaintiffs even purport to find $315 million in "nominal withholding" for the period from 2003 to 2007, see PX-189-A, despite BIA's major improvements in accounting and record-keeping practices during that period. Whatever problems have existed in the history of this trust, and however serious the misfeasances and malfeasances of the trustees over 120 years, there has never been any evidence of such prodigious pilfering of assets from within the trust system itself.*fn7

Methodologically, the two most important flaws in plaintiffs' model are: (1) that the model includes as collections certain sums that, by definition, will not be reflected as disbursements in the CP&R data, including Osage headright payments; and (2) that the model accepts historical receipt data and disregards historical disbursement data from the same documents and systems, or makes self-serving adjustments to one side of the ledger and not the other. These flaws will be discussed in turn.

III.B.i CP&R Data

Even if plaintiffs had treated 100 percent of the checks in the CP&R data as having been negotiated, those data would necessarily under-report disbursements from the IIM system. Transfers of funds from Tribal IIM accounts or SDAs directly to tribal trust funds are effected by intra-bureau bookkeeping transfers, not by checks that would show up in CP&R data. Tr. 569:6-22 (Herman). Michelle Herman provided two examples of such "BB transfers," see DX-480 at 9; DX-481 at 2, both of which involved millions of dollars. In a government document detailing disbursements for fiscal year 1999, DX-238 at 1, such BB transfers amount to $73.5 million of disbursements from the trust, compared to about $202 million in checks and EFTs. Plaintiffs' experts agreed that, unless such transfers had been made by check (which they were not), they would necessarily be absent from the CP&R data. Tr. 353:20-25 (Cornell); Tr. 1566:12-1567:10 (Palmer). This basic mistake in plaintiffs' theory ---ignoring or overlooking fund transfers --- had the effect of driving up the amount allegedly "withheld" and driving down the disbursement rate upon which plaintiffs relied for their calculations of "withholding" for all the years before 1988.

Transfers from the IIM system are not the only transactions overlooked by plaintiffs' single-minded reliance on CP&R data. The accounting systems relied on by Interior were designed to track money, not to aggregate throughput data. Accordingly, they register every intrafund transfer as a debit to one account and a credit to another. This (standard bookkeeping) process creates double-counting of receipts if only CP&R data is used to measure disbursements, because, while both the initial collection and the transfer will show up as "receipts," only checks cut when the money leaves the system will show up as "disbursements." Government contractors have been working to "map" such transfer transactions and eliminate them from the data, and their receipt and disbursement data has accordingly changed since the October trial. Tr. 481:11-482:15; 626:25-629:21; 648:19-649:15 (Herman). Reliance on CP&R data also results in overstated receipts because beginning IRMS balances registered as new receipts; government contractors have been working to eliminate those transactions as well. Tr. 624:1-626:15 (Herman).

Plaintiffs continue to draw their receipts data from government figures produced during the October trial, see PX-189-A n.1; AR-171, ignoring or refusing to accept the replacement of those figures with updated numbers, see DX-371, that have eliminated phantom receipts. They refuse to accept Ms. Herman's reductions in receipt data because she did not "show her work." Plaintiffs are skeptical about a reduction in revenue for the years 1986-1997 of "roughly $243 million" between the AR-171 exhibit in the October trial and the revised DX-371 exhibit produced at these proceedings, see Tr. 628:8-17 (Herman); PX-119, but they have in no way refuted Ms. Herman's testimony, and I find it to be credible. In any case, Ms. Herman's treatment of the data is demonstrably even-handed: disbursements have been reduced by roughly as much, if not more, over the same period. Tr. 649:7 (Herman); compare AR-171 at Column G with DX-371 at Column H for FY1986-FY1997.*fn8 Again, relying on the older numbers has a two-fold skewing effect --- driving up the nominal amount withheld in these years and driving down the calculated disbursement rate that controls the other years.

III.B.ii Osage Headrights

The error of plaintiffs' total reliance on CP&R data as representative of disbursements is especially palpable when one considers the inclusion in their model of Osage headright monies as trust receipts. Osage headrights are the product of the Osage Allotment Act of 1906, Pub. L. No. 59-321, 34 Stat. 539, which allotted Osage tribal lands to individual members, see id. at § 2, 34 Stat. 540, but preserved the mineral estate of those lands for common management under the direction of the tribe. See id. at § 3, 34 Stat. 543. The proceeds of the mineral estate were to be held in trust for, and distributed per capita to, individual Osage Indians. Id. at § 4, 34 Stat. 544.

There is a legal dispute between the parties as to whether Osage headright funds are IIM funds that fall within the class certification order in this case. See Order, [Dkt. 27] at 2-3 (class to consist of "beneficiaries of Individual Indian Money accounts"). What is beyond dispute, however, is that mineral estate proceeds destined for Osage headright holders are collected into a tribal trust fund and disbursed from that fund directly to individual headright owners, without ever passing through the IIM system. Tr. 473:22-474:1 (Herman). Osage headright disbursements are not to be found in CP&R disbursement data, and both of plaintiffs' experts agreed that Osage mineral estate revenues did not belong in IIM system receipt data. Tr. 1577:8-16 (Palmer); 334:7-23 (Cornell), see, e.g., DX-372 at 2025 et seq. Nevertheless, plaintiffs' model "corrects" government receipt data by adding in the value of Osage headright payments for every year. See PX-189-A at Column E.*fn9 The effect of this mistake, once again, is both to add over $800 million in erroneous receipts and to drive down plaintiffs' calculated disbursement rate, see Tr. 1596:6-17 (Palmer), causing the inaccuracy to metastasize.

III.B.iii Data "Adjustments"

Plaintiffs' demonstrated willingness to accept data they liked and reject data they disliked did not enhance the credibility of their model. Their initial model would accept government receipt data from a historical document, but reject disbursement data from the same document in favor of their calculated disbursement rate. See Tr. 291:18-292:23 (Cornell). Their rebuttal model continued to make self-serving modifications to the historical data, some driven by their calculated ...

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