Appendices — Long Island Island Savings Savings Bank, FSB v. United States (No. 07-1234)

TABLE OF CONTENTS

Page

APPENDIX A: Revised Opinion of the United

States Court of Appeals For the Federal

Circuit (Sept. 13, 2007)

APPENDIX B: Initial Opinion of the United

States Court of Appeals For the Federal

Circuit (Feb. 1, 2007)

APPENDIX C: Opinion of the United States

Court of Federal Claims (Sept. 15, 2005)

APPENDIX D: Opinion of the United States

Court of Federal Claims (Dec. 9, 2002)

APPENDIX E: Order of the United States

Court of Appeals For The Federal Circuit

Denying Petition For Rehearing (Dec. 28,

APPENDIX F: En Banc Order of the United

States Court of Appeals For the Federal

Circuit (Sept. 18, 2007)

APPENDIX A

[Revised Opinion of the United States Court of

Appeals For the Federal Circuit (Sept. 13,

2007)]

United States Court of Appeals, Federal Circuit

The LONG ISLAND SAVINGS BANK, FSB, and

The Long Island Savings Bank of Centereach

FSB, Plaintiffs-Appellees,

Vv,

UNITED STATES, Defendant-Appellant.

No. 2006-5029

Sept. 13, 2007

Before MAYER, GAJARSA, and LINN, Circuit

Judges.

GAJARSA, Circuit Judge.

In this Winstar-related case, the United States

appeals a decision of the United States Court of

Federal Claims granting a motion for summary

judgment by the Long Island Savings Bank, FSB

(“LISB”) and the Long Island Savings Bank of

Centereach FSB (“Centereach”) on the government’s

counterclaim and affirmative defenses. Long Island

Sav. Bank, FSB v, United States (“LISB Summ. J.”),

54 Fed. Cl. 607 (2002). The United States also

appeals the decision of the Court of Federal Claims

after trial awarding breach of contract damages to

LISB and Centereach in the amount of $435,755,000.

Long Island Sav. Bank, FSB v. United States (“LISB

Trial”), 67 Fed. Cl. 616 (2005).

2a

On February 1, 2007, this court held the banks’

claims against the government to be forfeited under

28 U.S.C. § 2514 and thus reversed. Long Island

Sav. Bank, FSB v. United States, 476 F.3d 917 (Fed.

Cir. 2007). The bankS filed a combined petition for

panel rehearing and rehearing en banc; a response

thereto was invited by the court and filed by the

government. Acting en banc, the court returned the

case to the original pane] for revision.

Accordingly, the previous opinion of the court in

this appeal, issued on February 1, 2007, and reported

at 476 F.3d 917, is withdrawn and vacated. Because

we hold that the contract is tainted from its

inception by fraud and thus void ab initio, and that

the claims against the government are excused by

prior material breach, we reach the same disposition

as our previous opinion and reverse the decision of

the Court of Federal Claims.

I.

This case is another of the many Winstar-cases

arising from the savings and loan crisis of the 1980s.

See generally United States v. Winstar Corp., 518

U.S. 839 (1996). The facts and procedural history

pertinent to this appeal follow.

A. The Parties and the Contract

In April 1982, the Federal Savings and Loan

Insurance Corporation (“FSLIC”) created Suffolk

County Federal Savings and Loan Association

(“Suffolk County”) by merging two thrifts on Long

Island that were incurring significant operating

losses. LISB Trial, 67 Fed. Cl. at 619. In October

1982, FSLIC undertook a national solicitation for

potential acquirers of Suffolk County because its

financial condition continued to decline. Jd. at 620.

3a

FSLIC determined that of the six bids received, the

bid from LISB, a conservatively run and healthy

thrift bank with branches in New York state, was the

most favorable. Jd. at 621. Specifically, “FSLIC had

determined that LISB’s bid was the most attractive

of all bids, both because it proposed the least amount

of financial assistance from FSLIC and because

FSLIC was attracted by LISB’s proven record of

sound financial management.” Compl. {4 24

(emphasis added). Negotiations began, and the

parties executed a final Assistance Agreement on

August 17, 1983. LISB Trial, 67 Fed. Cl. at 619.

Pursuant to the Assistance Agreement, Suffolk

County converted “from a federal mutual savings

and loan association into a federal stock savings

bank” and changed its name to Centereach, and

LISB acquired Centereach as a wholly owned

subsidiary by purchasing 100% of Centereach’s

authorized common stock for $100,000. Assistance

Agreement at 1. The agreement required the

government to make a direct cash contribution of $75

million to Centereach’s net worth account within

three business days of the conversion and

acquisition. Id. § 3. In total, the government infused

$122 million into Centereach under the Assistance

Agreement and related agreements. LISB Summ. J.,

54 Fed. Cl. at 610. In addition, the government

agreed that LISB and Centereach could use “the

accounting principles in effect for mergers and

acquisitions prior to the issuance of FASB # 72” to

account for the acquisition. Assistance Agreement §

10. Those accounting principles enabled Centereach

to account for approximately $625.4 million of

goodwill to be amortized over forty years by the

straight-line method. LISB Trial, 67 Fed. Cl. at 622.

See generally Winstar, 518 U.S. at 853-56,

4a

(describing goodwill accounting allowed by FSLIC

and advantages to acquiring institutions).

The Assistance Agreement explicitly conditioned

the government's obligations on, inter alia, the

“receipt of a certificate, dated as of the Purchase

Date, signed by the Chairman of the Board of LISB,”

who as discussed infra Part I1.B was James J.

Conway, Jr., stating that:

(A) The representations and warranties of LISB

set forth in § 11(b) are true and substantially correct

as of the Purchase Date; and

(B) No event has occurred and is continuing on

the Purchase Date which would constitute, or which

with notice or lapse of time or both would constitute,

a Breach.

Assistance Agreement § 2(c)(7). Of pertinence

here, LISB represented and warranted in section

11(b)(5) the following:

Compliance With Law. Except as disclosed in

Exhibit G, LISB is not in violation of any

applicable statutes, regulations or orders of,

or any restrictions imposed by, the United

States of America or any state, municipality

or other political subdivision or any agency of

the foregoing public units, regarding the

conduct of its business and the ownership of

its properties, including, without limitation,

all applicable statutes, regulations, orders

and restrictions relating to savings and loan

associations, equal employment

opportunities, employment retirement

income security, and environmental

standards and controls where such violation

would materially and adversely affect LISB’s

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business, operations or condition, financial or

otherwise.

(Emphasis added). LISB also represented and

warranted in section 11(b)(9):

Material Facts. This Agreement and all

information furnished by LISB in connection

with this Agreement or the Master

Agreement do not contain any untrue

statement of a material fact or omit to state a

material fact necessary to be stated in order

to make the statements contained therein not

misleading; and there is no fact which

materially adversely affects or in the affect

the business operation, affairs or condition,

financial or otherwise, of LISB or any of its

properties or assets which has not been set

forth in this Agreement, the Master

Agreement or the other documents furnished

under either Agreement.

(Emphasis added). It is undisputed that LISB’s

Chairman certified to the government that the

“representations and warranties of LISB set forth in

§ 11) are true and substantially correct” as

required by section 2(c)(7) of the Assistance

Agreement.

Section 16 specified that “[t]his Agreement and

the rights and obligations under it shall be governed

by the law of the State of New York to the extent

that Federal law does not control.”

B. Conway and his Law Firm Compensation

LISB and Centereach entered into the Assistance

Agreement through their Chairman of the Board of

Trustees and CEO James J. Conway, Jr. Assistance

6a

Agreement at 31. During his tenure at LISB and

Centereach, Conway also received compensation

from the law firm Conway & Ryan. The banks agree

that Conway & Ryan was their “primary outside

counsel” that “performed mortgage closing services

and occasionally represented [LISB] in foreclosure

proceedings,” and that a “substantial portion” of the

law firm’s revenues were from the banks’ mortgage

closing services. The parties’ summary judgment

submissions show that the law firm, starting in 1980

and ending with the firm’s dissolution in 1992,

derived at least 70% of its revenues from LISB.

“From 1982 to 1991, Conway caused LISB to utilize

the firm as LISB’s sole mortgage closing counsel, and

he ensured that the firm had the exclusive right to

represent LISB in connection with all mortgage

closings without action from the Board.” LISP

Summ. J., 54 Fed. Cl. at 610.

Conway, an attorney admitted to the New York

state bar, had worked for the law firm since 1953.

Conway became a member of LISB’s Board of

Trustees in 1966 and the Chairman in 1976. In 1980,

Conway received two legal opinions, one provided

unsolicited by a partner at the law firm and one

solicited by Conway from an outside attorney, stating

that New York law prohibited him from receiving

compensation from the law firm for legal services

relating to any of the banks’ loans.

In January 1982, the Board elected Conway to be

LISB’s CEO. After becoming CEO of LISB, Conway

stopped practicing law and engaging in other

professional services for the law firm. However,

Conway continued to receive compensation from the

law firm, and the banks agree that “Conway's

compensation included revenues received by [the law

Ta

firm] for performing” the “banks’ mortgage closing

services.” From September 1975, when Conway &

Ryan was incorporated as a New York professional

corporation, to December 1984, Conway owned 65%

of the law firm. Accordingly, Conway received at

least 60% of the law firm’s income for the fiscal years

ending in August 1981, 1982, and 1983.

In December 1984, Conway reduced his

ownership interest to 9% by, in part. transferring

51% of the law firm to his daughter. Around that

time, Conway had become aware of a thrift

regulation restricting his ownership interest in the

law firm to less than 10%. Conway retained his 9%

ownership interest until December 1989. Conway,

his daughter, and his daughter-in-law collectively,

however, continued to own at least 60% of the law

firm. Accordingly, while Conway received between

9% and 40% of the law firm’s annual income after

1984, Conway, his daughter, and his daughter-in-law

collectively received at least 60% annually, except for

the fiscal year ending in August 1985 when they

received 51%.

Between 1980 and 1989, Conway personally

received at least $3.5 million from the law firm.

Collectively, Conway, his daughter, and his

daughter-in-law received at least $10.9 million from

the law firm during the same time period.

While there were multiple opportunities to

disclose this continuing financial distribution,

neither Conway nor LISB_~ disclosed’ the

compensation from the law firm during this time

period. In December 1981, LISB “applied for

conversion from a state-chartered mutual savings

bank to a Federal mutual savings bank charter.” To

determine eligibility for conversion, the Federai

8a

Home Loan Bank Board (“FHLBB”) required LISB to

answer a management questionnaire, and LISB’s

president “stated that he [wa]s aware that approval

of the application to convert w[ould] require that

[LISB] adhere to various Federal and Insurance

Regulations.” LISB submitted, inter alia, the

following responses (in italics, underlined emphasis

added) in February 1982.

6. List each enterprise doing bus'ness with

the institution in which any of the

institution’s personnel have a direct ox

indirect interest. If such enterprise has had

any business’ transactions with the

institution since the ast examination,

indicate the nature of the interest and the

volume and type of business involved. If the

association provides space, employees,

equipment, services, or expenses, explain the

arrangement in full.

Officer James J. Conway, Jr. retains an

interest in a law firm that presently renders

service to the Bank and receives remuneration

from outside income of said firm.

xx

9. List any affiliated person of the institution

who receives any commission, fee, or rebate

from outside sources, or benefits, directly or

indirectly, from financing or any other

business placed through, by, or with the

institution, if such information has not been

furnished in response to questions six (6),

seven (7), and eight (8). Name such persons

and state the amount and purpose of, and the

Sa

basis and reesuns for, such disbursements,

credits or other benefits.

NONE

In February 1983, July 1984, and April 1986,

LISB submitted the same answers regarding

Conway in response to subsequent FHLBB

examinations. In December 1987, FHLBB employed

a different management questionnaire, but LISB

continued to respond that Conway “retains an

interest in a law firm that presently renders service

to the Bank and receives remuneration from outside

income of said firm.” (emphasis added).

In its summary judgment briefs to the Court of

Federal Claims and on appeal, the government

submitted an affidavit from the government’s

supervisory agent responsible for recommending

whether LISB’s acquisition of Centereach should be

approved in 1983. The affidavit stated that:

Had Mr. Conway correctly and accurately

revealed the nature and substance of the

kickback scheme and/or the fact that Mr.

Conway was violating the RESPA anti-

kickback provision prior to and during

negotiations with the FSLIC and FHLBB for

the Suffolk acquisition, I would have

recommended that we discontinue

discussions and negotiations with [LISB]

regarding its acquisition of Suffolk, and |

would have recommended that [LISB] be

removed as a bidder for Suffolk and or any

other supervisory acquisition. I also would

not have recommended that [LISB] be

permitted to purchase Suffolk.

10a

Vigna Aff. | 14. The affidavit also stated that

“FSLIC and FHLBB would not provide financial or

regulatory assistance to acquirers engaged in the

type of serious impropriety at issue in this case.” Id.

q 15.

Cc. Enactment of FIRREA

On August 9, 1989, the Government enacted the

Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (“FIRREA”), Pub. L. Ne.

101-73, 103 Stat. 183 (1989), which restricted

Centereach’s ability to count supervisory goodwill

and capital credit toward compliance with its

tangible capital requirement. As the Supreme Court

noted in Winstar, 518 U.S. at 857, “[t}he impact of

FIRREA’s new capital requirements upon

institutions that had acquired failed thrifts in

exchange for supervisory goodwill was swift and

severe.” Many institutions fell out of compliance

and were either seized by government regulators or

stayed in business only after “massive private

recapitalization.” Id. at 857-58.

“With FIRREA, Centereach’s capital ratio

plummeted from more than 8% positive to a negative

11%.” LISB Trial, 67 Fed. Cl. at 623. In addition,

the Federal Deposit Insurance Corporation

Improvement Act of 1991 (“FDICIA”), Pub. L. No.

102-242, 105 Stat. 2236 (1991), established sanctions

through regulation to _ institutions deemed

undercapitalized. The management of LISB and

Centereach thus embarked on a restructuring plan,

which involved selling branches, securities, and

loans, paying down other borrowings, merging LISB

and Centereach, and writing off goodwill. LISB

Trial, 67 Fed. Cl. at 625, 627-28.

lla

Several institutions sueé the government

“fbjelieving that [FHLBB] and FSLIC had promised

them that the supervisory goodwill created in their

merger transactions could be counted toward

regulatory capital requirements,” and the Supreme

Court subsequently held in Winstar that neither the

canon of unmistakeability nor the doctrine of

sovereign acts prevented the government from being

liable for breaching contracts by subsequently

changing the relevant law. 518 U.S. at 843, 858,

860.

D. Complaint Against the Government, the

Discovery of Conway’s Law Firm

Compensation, and the Goverament’s

Affirmative Defenses

With the enactment of FIRREA, Conway, as

Chairman of the Board of Trustees and CEO of the

banks, hired an outside law firm to advise the banks.

See Doe v. Poe, 595 N.Y.S.2d 503, 189 A.D.2d 132

(N.Y. App. Div. 1993). In February 1990, Conway,

the banks’ president, the outside law firm, and

another outside law firm that Conway had hired for

the banks met to discuss a lawsuit by the banks

against the government. The outside law firms

“suggested that, in preparation for the pending

Federal litigation and upcoming regulatory

inspections, they conduct a ‘due diligence’ inquiry to

determine whether the bank[s were] in compliance

with all regulatory requirements.” Conway and the

president of the banks agreed. See id. at 503-04. In

two meetings that year, the outside law firms

discovered the law firm compensation that Conway

was receiving and in August 1990, advised Conway

to retain his own counsel. See id. at 504.

“Sometime thereafter, a special committee of the

12a

bank[s’] board of trustees was formed to investigate

the relationship between [Conway], his family, and

his former law firm.” Id. Conway filed suit in New

York state court to enjoin the outside law firms from

disclosing to the committee the information learned

from the meetings based on attorney-client privilege.

See id. at 504.

In June 1992, Conway resigned from LISB and

Centereach. In August 1992, LISB and Centereach

filed a complaint against the government in the

Court of Federal Claims alleging that the

government breached its contractual obligations by

enacting FIRREA. According to the banks, “[ijn

September 1992, the [New York state] court rejected

Conway’s claim [seeking to enjoin the outside law

firms from disclosing the information to the banks].

The Banks immediately informed OTS upon learning

the facts of Conway’s relationship with [his law

firm].” /.ppellee Br. 42.

In February 19938, OTS commenced an

investigation into Conway’s law firm compensation.

Based on its findings, OTS concluded that Conway

“engaged in violations of federal conflict-of-interest

and disclosure regulations, participated in conflicts

of interest constituting an unsafe or unsound

practice within the meaning of 12 C.F.R. § 571.7, and

breached his fiduciary duty owed to LONG ISLAND

SAVINGS.” J.A. 300455. In February 1994, “while

neither admitting or denying the OTS’ findings and

conclusions,” Conway entered into a consent order

with OTS in which Conway stipulated and consented

to the order banning him from the thrift and banking

industry and requiring him to pay $1.3 million in

restitution to LISB. J.A. 300456-57.

13a

In February 1998, Conway pled guilty to a

criminal misdemeanor information charging him

with violating 18 U.S.C. § 215.! Specifically, Conway

agreed with the following facts: “[iJn his capacity as

chief executive officer and Chairman of LISB, ...

[Conway] influenced whether LISB continued to use

the law firm as its legal counsel for residential

mortgage closings”; “[fJrom 1983 through 1989, while

holding his executive LISB positions, [Conway]

received $3,194,103.87 in compensation from the law

firm”; and “[i]Jn or about and between September 3,

1986, and October 30, 1987, ... [Conway] knowingly,

intentionally and corruptly solicit[ed], demanded,

accepted and agreed to accept ... funds from the law

firm paid directly to him, ... intending to be

influenced and rewarded in connection with ... the

assignment of the LISB residential mortgage closing

work to the law firm.”

This conviction led the New York Supreme

Court, Appellate Division, to disbar Conway for

professional misconduct in August 2000. In re

Conway, 712 N.Y.S.2d 610, 275 A.D.2d 24 (N.Y. App.

Div. 2000). Specifically, the court found:

The mitigating circumstances proffered by

the respondent notwithstanding, the fact

remains that, while chairman of the board

and chief executive officer of a savings bank,

he engaged in a scheme of illegal kickbacks,

using his daughter and daughter-in-law as

conduits to circumvent Federal law

prohibiting him from receiving compensation

1 18 U.S.C. § 215 is a criminal statute governing the receipt of

commissions or gifts for procuring loans by an “officer, director,

employee, agent, or attorney of a financial institution.”

l4a

from his former law firm, which relied on the

bank for approximately 90% of its business.

The payments were substantial, totalling

[sic] more than three million dollars. Such

misconduct, which went on for several years,

can hardly be deemed aberrational.

Id. at 611.

In February 2001, the government filed its

answer to the complaint in the Court of Federal

Claims. The government's answer included

affirmative defenses and counterclaims asserting

forfeiture of the plaintiffs’ claims and rescission of

the contract “because the thrifts committed fraud in

the inducement as well as fraud in the performance

of the alleged contract.” Answer {4 175-84.

According to the government, it submitted this filing-

answer, affirmative defenses, and counterclaims-

before the time negotiated by the parties. See U.S.

Summ. J. Reply 38-41 (May 30, 2001) (detailing stay

of Winstar-related cases pending Supreme Court

decision and Omnibus Case Management Order

stating in part that the government (a) in responding

to plaintiffs’ summary judgment motion “need not

identify any defenses of any kind, counterclaims, set-

offs, pleas in fraud” and that “the failure to assert

those defenses in its response will not constitute a

waiver and (b) “shall not file an answer to the

complaint in any case, and no defenses or arguments

of any kind shall be deemed waived by reason of

defendant's not having filed an answer to any

complaint”). The record indicates that the banks do

not dispute this procedural history. See Pis.’ Summ.

J. Surreply 20-21 (Jun. 18, 2001) (discussing

timeliness without disputing §government’s

representation of procedural history).

15a

E. Proceedings Before the Court of Federal

Claims

On December 9, 2002, the Court of Federal

Claims decided in favor of LISB and Centereach on

the parties’ cross-motions for summary judgment on

the government's affirmative defenses and

counterclaims. LISB Summ. J., 54 Fed. Cl. 607.

Specifically, the Court of Federal Claims found that

“Conway and his firm’s status as ‘affiliated persons’

did not cause LISB to be in violation of the

Assistance Agreement,” id. at 612-14; that it “cannot

conclude that LISB, as a corporate entity, acted

fraudulently,” id. at 614-18; and that Conway's

conflict-of-interest conduct could not be imputed to

LISB, id. at 618-19. The Court of Federal Claims

thus rejected the government's summary judgment

motion asserting that “(1) plaintiffs’ claims are

forfeited under a special plea in fraud pursuant to 28

U.S.C. § 2514; (2) common law fraud renders the

contract unenforceable; (3) the contract should be

rescinded and $122 million repaid to the

Government; and (4) plaintiffs’ prior material breach

precludes damages.” LISB Summ. J,, 54 Fed. Cl. at

609.

On September 15, 2005, after a twenty-four day

trial, post-trial briefing, and closing arguments, the

Court of Federal Claims issued its opinion and order

holding the government liable and awarding

$435,755,000 in damages to LISB and Centereach.

LISB Trial, 67 Fed. Cl. at 618.

The government appeals the granting of

summary judgment regarding its affirmative

defenses in favor of LISB and Centereach in LISB

Summ. J. and the determination of damages in LISB

Trial. The Court of Federal Claims exercised

16a

jurisdiction pursuant to the Tucker Act, 28 U.S.C. §

1491(a)(1), and entered final judgment on September

30, 2005. We have jurisdiction pursuant to 28

U.S.C. § 1295(a)(38).

II.

The Court of Federal Claims applies the same

summary judgment standard as that of federal

district courts: summary judgment is proper if the

evidence demonstrates that “there is no genuine

issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.”

See Ct. Fed. Cl. R. 56(c); Fed. R. Civ. P. 56(c); see

also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23

(1986); SmithKline Beecham Corp. v. Apotex Corp.,

403 F.3d 1331, 1337 (Fed. Cir. 2005). Therefore, we

review a grant of summary judgment by the Court of

Federal Claims de novo, drawing justifiable factual

inferences in favor of the party opposing the

judgment. SmithKline, 403 F.3d at 1337; Winstar

Corp. v, United States, 64 F.3d 1531, 1539 (Fed. Cir.

1995) (en banc). Once the moving party has satisfied

its initial burden, the opposing party must establish

a genuine issue of material fact and cannot rest on

mere allegations, but must present actual evidence.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986). Issues of fact are genuine only “if the

evidence is such that a reasonable jury could return

a verdict for the nonmoving party.” Id.

III.

A. Federal Common Law Fraud

The government asserted that the plaintiffs

committed fraud in the inducement as well as fraud

in the performance of the contract and that federal

common law renders the Assistance Agreement

17a

unenforceable. Answer 9 175-81; U.S. Summ. J.

Mot. 31-47 (Apr. 17, 2001); LISB Summ. d., 54 Fed.

Cl. at 609, 615. The plaintiffs asserted that there

was neither fraud in the inducement nor fraud in the

performance of the Assistance Agreement and that

any counterclaims and affirmative defenses based on

common law fraud fail. Pls.’ Summ. J. Mem. 41-55

(May 3, 2001). The Court of Federal Claims agreed

with the plaintiffs. LISB Summ. J., 54 Fed. Cl. at

620. We reverse.

Procedurally, while the parties’ briefs to this

court could appear to focus on the government’s

special plea in fraud under 28 U.S.C. § 2514, the

issue of federal common law fraud is properly before

this court. In City of Sherrill v. Oneida Indian

Nation, 544 U.S. 197 (2005), the Supreme Court

“resolve/d] th[e] case on considerations not discretely

identified in the parties’ briefs,” stating that the

question addressed “is inextricably linked to, and is

thus ‘fairly included’ within, the questions

presented.” Jd. at 214 n. 8; see also Connor v, Finch,

431 U.S. 407, 421 n. 19 (1977) (stating that issues

may “appropriately be viewed as an issue implicitly

raised by the parties”). In this case, the parties’

briefs to the Court of Federal Claims and the opinion

of the Court of Federal Claims meshed fraud under.

28 U.S.C. § 2514 together with fraud under common

law. Indeed, the Court of Federal Claims evaluated

the elements of common law fraud as the elements of

§ 2514. LISB Summ. J., 54 Fed. Cl. at 615.

Similarly, in the government’s brief to this court,

the pertinent issue presented is “[w]hether the trial

court erred, as a matter of law, in refusing to impute

knowledge of fraud in the inducement of a

Government contract from the chairman and chief

18a

executive officer of the plaintiff, Long Island Savings

Bank, FSB (‘LISB’), to the institution itself.”

Appellant Br. 2 (emphasis added).

Therefore, to the extent that the government’s

defense based on federal common law fraud was not

explicitly appealed, we find that the defense “is

inextricably linked to, and is thus ‘fairly included’

within, the questions presented.” Sherrill, 544 U.S.

at 214 n. 8. Moreover, under these circumstances,

we can exercise our discretion to apply federal

common law in this case. Kamen v, Kemper Fin.

Servus., Inc., 500 U.S. 90, 99 (1991) (“When an issue

or claim is properly before the court, the court is not

limited to the particular legal theories advanced by

the parties, but rather retains the independent

power to identify and apply the proper construction

of governing law.”); Becton Dickinson & Co. v. C.R.

Bard, Inc., 922 F.2d 792, 800 (Fed. Cir. 1990)

(stating that “practice of [waiving an issue not raised

by an appellant in its opening brief] is, of course, not

governed by a rigid rule but may as a matter of

discretion not be adhered to where circumstances

indicate that it would result in basically unfair

procedure”); cf. Harris Corp. v. Ericsson Inc., 417

F.3d 1241, 1251-52 (Fed. Cir. 2005) (stating that

“[a]n appellate court retains case-by-case discretion

over whether to apply waiver,” and holding that

claim construction arguments “advocating the same

concept” are properly addressed). Therefore, we

proceed to evaluate the merits of the government’s

common law fraud assertion.

The Supreme Court has stated that “[w]hen the

United States enters into contract relations, its

mghts and duties therein are governed generally by

the law applicable to contracts between private

19a

individuals.” Winstar, 518 U.S. at 895. The Court

has also stated that “[i]Jt is customary, where

Congress has not adopted a different standard, to

apply to the construction of government contracts the

principles of general contract law,” Priebe & Sons,

Inc. v, United States, 3382 U.S. 407, 411 (1947),

“which become federal common law,’ Fomby-Denson

v. Dep't of Army, 247 F.3d 1366, 1373-74 (Fed. Cir.

2001). In this case, the parties have not asserted

that Congress has adopted a standard other than

federal common law. Indeed, the parties recognized

the governing role of federal common law in the

Assistance Agreement, which states in section 16

that “[t]his Agreement and the rights and obligations

under it shall be governed by the law of the State of

New York to the extent that Federal law does not

control.” In short, federal common law governs this

action.

The Restatement of Contracts reflects many of

the contract principles of federal common law. (Cf.

Mobil Oil Exploration & Producing Se., Inc. v.

United States, 530 U.S. 604, 608 (2000) (relying

similarly on the Restatement of Contracts for

principles of repudiation and restitution); Franconia

Assocs. v. United States, 536 U.S. 129, 141-43 (2002)

(applying principles of general contract law by

relying in part on Restatement (Second) of Contracts

(1979) to determine whether contract claim against

federal government was within Tucker Act statute of

limitations). As set forth in the Restatement of

Contracts, a misrepresentation may prevent the

formation of a contract or may make a contract

voidable. See Restatement (Second) of Contracts §§

163-64 (1981). The difference between the former

and the latter is sometimes referred to as the

difference between misrepresentations that make a

20a

contract “void” versus “voidable.” See id. § 7 cmt. a,

§ 163 cmt. c.

We have stated that “the general rule is that a

Government contract tainted by fraud or wrongdoing

is void ab initio.” Godley v. United States, 5 F.3d

1473, 1476 (Fed. Cir. 1993) (citing United States v.

Miss. Valley Generating Co., 364 U.S. 520, 564,

(1961), and J.E.7.S., Inc. v. United States, 838 F.2d

1196, 1200 (Fed. Cir. 1988)).2 We established this

rule in J.E.T.S., which held that a government

contractor’s false certification barred its subsequent

claim. 838 F.2d at 1197. Specifically, we stated:

The contract which, according to the Board’s

decision in the first case, the government

constructively had changed, was procured by

and therefore permeated with fraud. As

discussed in part III below, J.E.T.S. obtained

this contract by knowingly falsely stating

that it was a small business. Had it stated

the truth about its size, it would not have

received the contract. A government

contract thus tainted from its inception by

fraud is void ab initio, like the government

contracts held void because similarly tainted

by a prohibited conflict of interest in United

States v. Mississippi Valley Generating Co.,

364 U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268

(1961), and K & R Eng’g Co. v, United States,

616 F.2d 469, 222 Ct.Cl. 340 (1980).

J.E.T.S., 838 F.2d at 1200. Therefore, to prove that

a government contract is “tainted from its inception

2 But see United States v. Jamieson Sci. & Eng’g, Inc., 214

F.3d 1372, 1377 (D.C. Cir. 2000) (disagreeing with J.E.T.S. and

Godley).

Zla

by fraud” and is thus “void ab initio,” the government

must prove that the contractor (a) obtained the

contract by (b) knowingly (c) making a false

statement. We address these elements in reverse

order.

1. False statement

In J.E.T.S., we affirmed the Board’s decision that

the government contractor falsely certified that it

was a small business. 838 F.2d at 1201. Similarly, in

this case, the government asserts that LISB falsely

certified that the “representations and warranties of

LISB set forth in § 11(b) [we]lre true and

substantially correct as of the Purchase Date.”

Specifically, section 2(c)(7) of the Assistance

Agreement conditioned the government’s obligations

on the receipt of a certificate “signed by the

Chairman of the Board of LISB stating” that the

“representations and warranties of LISB set forth in

§ 11(b) are true and substantially correct as of the

Purchase Date” and that “{[nJjo event has occurred

and is continuing on the Purchase Date which would

constitute, or which with notice or lapse of time or

both would constitute, a Breach.” It is undisputed

that Conway as Chairman and CEO of LISB had the

authority to submit the certification and did so.

LISB Summ. J., 54 Fed. Cl. at 615-16. In addition,

there is no dispute that Conway’s conduct in

submitting the certification should be imputed to

3 Neither LISB nor Centereach has raised any issues regarding

the Assistance Agreement requiring the certification of the

Chairman of LISB but not of Centereach. Indeed, for purposes

of the government's counterclaims and affirmative defenses, all

of the parties have treated LISB and Centereach as the same in

this appeal. Therefore, we do so as well.

22a

LISB, and the certification required by section 2(c)(7)

constituted a statement to the government.

The falsity of the certification depends on the

representation and warranty provisions of the

contract. LISB represented and warranted in section

11(b)(5) of the Assistance Agreement that it was “not

in violation of any applicable statutes, regulations or

orders.” The government argued on appeal that the

contract thus required LISB to comply with 12

C.F.R. § 563.17(a) (1984), which provided that LISB

and Centereach “shall maintain safe and sound

management.” In addition, the regulations charged

FHLBB with “the enforcement of laws, regulations,

or conditions against ... the officers or directors,”12

C.F.R. § 500.3 (1984), and FHLBB required that

officers refrain from breaching fiduciary duties

involving personal profit, see 12 C.F.R. § 563.39

(1984) (“Termination -for cause shall include

termination because of ... breach of fiduciary duty

involving personal profit.”).

In this case, the Court of Federal Claims found

that “Conway and his firm’s impropriety under

banking laws is evident.” LISB Summ. Jd., 54 Fed.

Cl. at 614. Similarly, “based on its findings from the

Investigation, the OTS” concluded that Conway

“breached his fiduciary duty owed to” LISB. As a

result, Conway consented to an order that banned

him from the thrift and banking industry and that

required him to pay $1.3 million in restitution and

reimbursement to LISB. The banks concede that

Conway’s compensation from the law firm during the

time he was Chairman and CEO of LISB and

Centereach, between at least 1982 and 1989,

“included revenues received by [the law firm] for

performing” the “banks’ mortgage closing services.”

23a

Moreover, by pleading guilty to violating 18 U.S.C. §

215, Conway admitted that he committed a crime by

corruptly accepting $3,194,103.87 in compensation

from the law firm intending to be influenced and

rewarded for “the assignment of the LISB residential

mortgage closing w rk to the law firm.” Therefore,

we agree that Conway breached his fiduciary duties

to LISB and Centereach and profited personally from

that breach.

Nonetheless, the Court of Federal Claims found

that LISB was not operating in an unsafe and

unsound manner under 12 C.F.R. § 563.17. The

Court of Federal Claims reasoned that “had Conway

not accepted compensation related to mortgage

closing services of LISB’s borrowers, but the

relationship between LISB and the firm was

otherwise the same, no impropriety would exist.”

LISB Summ. J., 54 Fed. Cl. at 614. By focusing

solely on the relationship between LISB and the law

firm, the Court of Federal Claims improperly ignored

the relationship between Conway and both LISB and

Centereach. Specifically, the Chairman of the Board

and CEO of LISB and Centereach breached his

fiduciary duties for personal profit. This is not safe

and sound management. Even if it were unclear

whether Conway’s conduct precluded a finding of

safe and sound management, LISB represented and

warranted in section 11(b)(9) of the Assistance

Agreement that it would not “omit to state a material

fact necessary to be stated in order to make the

statements contained therein not misleading.” Ata

minimum, Conway’s conduct was a material fact

necessary to make LISB’s_ section 11(b)(5)

representation and warranty of compliance with law,

including safe and sound management, not

misleading.

24a

Therefore, LISB’s certification to the government

rega”ding the “true and substantially correct” nature

of the representations and warranties made in the

Assistance Agreement was false.

2. Knowledge

The Court of Federal Claims found that

“[ajlthough LISB knew Conway was _ being

compensated by his firm, this Court cannot conclude

that [others at] LISB knew that the arrangement

was improper, and, therefore, a misrepresentation.”

LISB Summ. J., 54 Fed. Cl. at 616-17. We see no

error in this factual conclusion.

The critical inquiry thus becomes whether

Conway had knowledge of the certification’s falsity

and if so, whether such knowledge may be imputed

to LISB.

a. Knowledge of falsity

The Court of Federal Claims found that Conway

entered into the Assistance Agreement “knowing his

conflicting dual relationship with his firm and LISB

prohibited him from entering into the Assistance

Agreement and from receiving compensation from

his firm.” LISB Summ. J., 54 Fed. Cl. at 615-16. We

agree. First, as discussed, Conway certified under

the Assistance Agreement that there were no

omissions of material fact regarding LISB’s

compliance with the law, including the regulation

requiring “safe and sound management,” that would

mislead the government. Second, Conway received

two legal opinions before submitting the Assistance

Agreement certification stating that he was legally

prohibited from receiving compensation from the law

firm for legal services relating to any of the banks’

loans. Third, the banks concede that Conway’s

25a

compensation from the law firms during the time he

was Chairman and CEO of LISB and Centereach,

between at least 1982 and 1989, “included revenues

received by [the law firm] for performing” the “banks’

mortgage closing services.”

Our conclusion is further supported by the facts

surrounding the Assistance Agreement. Neither

Conway nor LISB accurately disclosed the

compensation from his law firm when prompted by

the government in February 1982, February 1983,

July 1984, April 1986, or December 1987. In each

instance, LISB responded that Conway “retains an

interest in a law firm that presently renders service

to the Bank and receives remuneration from outside

income of said firm.” This was false because, as the

banks concede, Conway’ compensation from the law

firm “included revenues received by [the law firm] for

performing” the “banks’ mortgage closing services.”

In pleading guilty, Conway also admitted that: “{ijn

his capacity as chief executive officer and Chairman

of LISB, ... [Conway] influenced whether LISB

continued to use the law firm as its legal counsel for

residential mortgage closings”; “[fJrom 1983 through

1989, while holding his executive LISB positions,

[Conway] received $3,194,103.87 in compensation

from the law firm”; and “[ijn or about and between

September 3, 1986, and October 30, 1987,

[Conway] knowingly, intentionally and corruptly

solicit(ed], demanded, accepted and agreed to

accept... funds from the law firm paid directly to him,

. intending to be influenced and rewarded in

connection with ... the assignment of the LISB

residential mortgage closing work to the law firm.”

LISB and Centereach attempt to minimize the

significance of Conway’s guilty plea, citing to his trial

testimony in this case where he explained that he

26a

pled to protect his children. However, “a party

cannot simply contradict an earlier sworn

statement,” and there is no credible evidence here

supporting the contradiction. Cf. Gemmy Indus.

Corp. v. Chrisha Creations Ltd., 452 F.3d 1353, 1359

(Fed. Cir. 2006) (finding summary judgment grant

improper where credible evidence supported

contradiction).

In addition, when the banks’ outside counsel,

ironically hired by Conway himself, discovered

Conway’s law firm compensation, Conway attempted

but failed to enjoin the outside counsel from

disclosing the information to the banks and the

government regulators. See Doe v. Poe, 595 N.Y.S.2d

at 504-05.

Therefore, the record demonstrates that Conway

had knowledge of the certification’s falsity.

b. Imputation of knowledge

While we apply the principles of general contract

law to the construction of government contracts,

whether federal common law or state law applies to

imputation of knowledge is a separate question. In

this case, however, we need not decide this choice of

law question because we can resolve the issue of

knowledge imputation based on legal principles

common to both federal and state law.

Under the general common law of agency,

“{e]xcept where the agent is acting adversely to the

principal ..., the principal is affected by the

knowledge which an agent has a duty to disclose to

the principal ... to the same extent as if the principal

had the information.” Restatement (Second) of

Agency § 275 (1958); cf. Comty. For Creative Non-

Violence v. Reid, 490 U.S. 730, 751-52 (1989) (relying

27a

on Restatement (Second) of Agency to determine

whether hired party is employee under general

common law of agency for Copyright Act purposes).

Similarly, the Restatement (Second) of Agency § 282

(1958) specifies that a “principal is not affected by

the knowledge of an agent in a transaction in which

the agent secretly is acting adversely to the principal

and entirely for his own or another’s purposes”

(emphasis added). Regarding the emphasized

language, the “mere fact that the agent’s primary

interests are not coincident with those of the

principal does not prevent the latter from being

affected by the knowledge of the agent if the agent is

acting for the principal’s interests.” Restatement

(Second) of Agency § 282 cmt. c.

The state law of New York has similar

standards.

In general, knowledge acquired by an agent

acting within the scope of his or her agency is

imputed to the principal and the latter is

bound by that knowledge even if the

information is never actually communicated.

An exception to this rule occurs when the

agent has abandoned his or her principal's

interests and is acting entirely for his or her

own or another’s purposes,

Christopher S. v. Douglaston Club, 713 N.Y.S.2d 542,

275 A.D.2d 768 (N.Y. App. Div. 2000) (citing Center

v. Hampton Affiliates, Inc., 488 N.E.2d 828, 829-30,

66 N.Y.2d 782 (N.Y. 1985)) (emphasis added). The

adverse interest exception “cannot be invoked merely

because he has a conflict of interest or because he is

not acting primarily for his principal.” Center, 488

N.E.2d at 830 (citations omitted).

28a

In this case, under the general rule of

imputation, it is undisputed that Conway was an

agent of the banks and had knowledge of his illegal

compensation scheme. Therefore, the first step

indicates that Conway's knowledge should generally

be imputed to the banks, and the question becomes

whether the adverse interest exception applies.

The Court of Federal Claims found that Conway

“ha[d] abandoned his principal's interest and [wal]s

acting to defraud his principal, entirely for his own

or another’s purpose” because “had the knowledge

that the Government seeks to impute to LISB

actually been disclosed to LISB, the success of

Conway’s scheme would have been impaired.” LISB

Summ. J., 54 Fed. Cl. at 619. We do not agree with

this analysis or its conclusion.

It is true that Conway pursued his own interests

in his illegal compensation arrangement with his law

firm. The mere fact that the agent’s primary

interests are not coincident with those of the

principal, however, is not sufficient to invoke the

adverse interest exception. Rather, both federal

common law and New York state law require that

the agent act “entirely for his own or another's

purposes.” Here, Conway’s arrangement to refer all

of LISB’s mortgage closings to the law firm served at

least two purposes: (1) to funnel to Conway a portion

of the fees paid, which would have been paid

regardless, by the principal's customers to the law

firm; and (2) to obtain the proper legal services

required by LISB for its mortgage closings. There

was no evidence that the legal services were

deficient. There was a clear benefit to LISB througk

this arrangement because the law firm was the

bank’s primary outside counsel, performed mortgage

29a

closing services for and on behalf of the bank, and

represented the bank in foreclosure proceedings. In

addition, by signing the false certification under the

Assistance Agreement, Conway enabled LISB to

acquire Centereach under previously negotiated

terms. In hindsight, LISB’s interests probably

would have been better served had Conway not

perpetrated his illegal compensation arrangement,

but the record fails to support the assertion that

Conway entirely abandoned LISB’s interests for his

own. Therefore, Long Island cannot invoke the

adverse interest exception because the CEO’s

conduct was not entirely for his own purposes, and

the general rule applies imputing the agent’s

knowledge to the principal. As a matter of law,

under both federal and state legal doctrines

governing knowledge imputation, LISB and

Centereach knew that the certification to the

government was false.

3. Causation

In Godley, we emphasized that for a government

contract to be tainted by fraud or wrong doing and

thus void ab initio, the record must show some

causal link between the fraud and the contract.

Godley, 5 F.3d at 1476 (remanding because “this

court cannot determine whether [the government

agent’s} illegal conduct caused any unfavorable

contract terms’). In J.E.7.S., the record

demonstrated causation because “[hjad_ [the

government contractor] stated the truth about its

size, it would not have received the contract.” 838

F.2d at 1200.

Here, the Court of Federal Claims found that the

“Government contracted for full disclosure of any

conflicts-of-interest in order to assure the safe and

30a

sound management of LISB, and it relied on

Conway's’ statements. The Government thus

justifiably relied on Conway’s misrepresentation.”

54 Fed. Cl. at 617. We agree.

In its summary judgment briefs to the Court of

Federal Claims and on appeal, the government

pointed to an affidavit from the government’s

supervisory agent responsible for recommending

whether LISB’s acquisition of Centereach should be

approved in 1983. The affidavit stated that:

Had Mr. Conway correctly and accurately

revealed the nature and substance of the

kickback scheme and/or the fact that Mr.

Conway was violating the RESPA anti-

kickback provision prior to and during

negotiations with the FSLIC and FHLBB for

the Suffolk acquisition, I would have

recommended that we discontinue discussions

and negotiations with [LISB] regarding its

acquisition of Suffolk, and I would have

recommended that [LISB] be removed as a

bidder for Suffolk and or any other

supervisory acquisition. I also would not

have recommended that [LISB] be permitted

to purchase Suffolk.

Vigna Aff. { 14 (emphasis added); see also id. J 15

(‘The FSLIC and FHLBB would not provide

financial or regulatory assistance to acquirers

engaged in the type of serious impropriety at issue in

this case.”), Moreover, the active breaching of

fiduciary duties by the Chairman of the Board and

the CEO constitutes material information when the

government (a) undertakes a national solicitation for

potential acquirers of a _ declining financial

institution; (b) contributes $75 million of cash to the

3la

declining institution’s net worth within days of the

acquisition; (c) conditions performance on a

representation and warranty of compliance with the

law, including regulations requiring “safe and sound

management”; and (d) conditions performance on a

representation and warranty that there has been no

omission of “a material fact necessary to be stated in

order to make the statements contained therein not

misleading.” Under these circumstances, the only

reasonable inference is that had the plaintiffs stated

the truth about Conway, they would not have

received the contract. The plaintiffs have set forth

no affirmative evidence such that a reasonable jury

could conclude otherwise. See Anderson, 477 U.S. at

248 (stating that issues of fact are genuine for

summary judgment purposes only “if the evidence is

such that a reasonable jury could return a verdict for

the nonmoving party’). Indeed, the plaintiffs

conceded in their complaint that “FSLIC had

determined that LISB’s bid was the most attractive

of all bids, beth because it proposed the least amount

of financial assistance from FSLIC and because

FSLIC was attracted by LISB’s proven record of

sound financial management.” Compl. {| 24

(emphasis added).

Accordingly, the government has proven that the

plaintiffs obtained the contract by knowingly making

a false certification. The Assistance Agreement was

thus tainted at its inception by fraud and void ab

initio,

B. Prior Material Breach

Even if the contract were not void, the doctrine of

prior material breach precludes the plaintiffs’ breach

of contract claim for damages. We have stated:

32a

Under that doctrine, when a party to a

contract is sued for breach, it may defend on

the ground that there existed a legal excuse

for its nonperformance at the time of the

alleged breach. Faced with two parties to a

contract, each of whom claims breach by the

other, courts will “often ... impose liability on

the party that committed the first material

breach.”

Barron Bancshares, Inc. vy. United States, 366 F.3d

1360, 1380 (Fed. Cir. 2004); see also Christopher

Village, L.P. v. United States, 360 F.3d 1319, 1334

(Fed. Cir. 2004). In both Barron and Christopher

Village, we referenced § 237 cmt. b of the

Restatement (Second) of Contracts (1981), which

states:

The rule is based on the principle that where

performances are to be exchanged under an

exchange of promises, each party is entitled

to the assurance that he will not be called

upon to perform his remaining duties of

performance with respect to the expected

exchange if there has already been an

uncured material failure of performance by

the other party.

See Barron, 366 F.3d at 1380-81; Christopher

Village, 360 F.3d at 1334.

In this case, the government asserts, and we

agree, that LISB’s false certification constitutes an

uncured material failure of performance that

precludes the plaintiffs’ claim for damages. First,

because the Assistance Agreement explicitly

conditioned the government’s obligations on the

receipt of a certificate “signed by the Chairman of the

33a

Board of LISB stating” that the “representations and

warranties of LISB set forth in § 11(b) are true and

substantially correct as of the Purchase Date” and

that “[njo event has occurred and is continuing on

the Purchase Date which would constitute, or which

with notice or lapse of time or both would constitute,

a Breach,” the falsity of LISB’s certification as

discussed in supra Part III.A.1 represents a failure of

performance. Second, based on our discussion of

causation in supra Part III.A.3,4 LISB’s failure of

performance is material. We have also noted “that

our case law holds that any degree of fraud is

material as a matter of law.” Christopher Village,

360 F.3d at 1335. Third, because LISB’s certification

was a material condition precedent to the

government’s obligations, and because the Court of

Federal Claims found that the government relied on

the certification, LISB’s failure of performance in

uncured. See Restatement (Second) of Contracts §

242 (1981) (stating circumstances significant in

“determining the time after which a party’s uncured

material failure to render or to offer performance

discharges the other party’s remaining duties to

render performance”). Fourth, it is undisputed that

LISB’s false certification in 1983 preceded the

government’s breach with the enactment of FIRREA

in 1989.

* We note that the knowledge required for federal common law

fraud making a contract void and discussed in supra Part

IIL.A.2 is not required for prior material breach. See

Restatement (Second) of Contracts § 236 (1981) cmt. a (“The

defect need not be will[ljful or even negligent.”); id. cmt. b

(“When performance is due, however, anything short of full

performance is a breach, even if the party who does not fully

perform was not at fault.”).

34a

There is one wrinkle. We have held that

“through its continued performance of the contract,

the government [may waive] any claim for prior

material breach.” Barron, 366 F.3d at 1383; see also

Westfed Holdings, Inc. v. United States, 407 F.3d

1352, 1360 (Fed. Cir. 2005) (‘A party to a contract

may waive the breach of an agreement by the

continued acceptance of performance by the

breaching party without reservation of rights.”); cf.

Old Stone Corp. v, United States, 450 F.3d 1360,

1371 n.6 (Fed. Cir. 2006) (discussing differences

between doctrines of waiver and election). We have

also stated in this context that “[w]Jaiver is an

affirmative defense, as to which the breaching party

bears the burden of proof.” Westfed, 407 F.3d at 1360.

Here, the banks bear the burden of proving that the

government waived its prior material breach

defense.

The plaintiffs have not asserted that they

received an express statement from the government

waiving its prior material breach defense. The

question thus becomes whether the government

impliedly waived LISB’s breacl In Westfed, another

Winstar-related case, we stated that “[i)mplied

waiver may be inferred by conduct or actions that

mislead the breaching party into reasonably

believing that the rights to a claim arising from the

breach was waived.” 407 F.3d at 1361.

Because the Assistance Agreement at issue in

Westfed included a provision providing a non-waiver

clause stating that “[n]o forbearance, failure, or delay

by any party in exercising or partially exercising ...

right [given by the Agreement], power, or remedy

shall operate as a waiver thereof or preclude its

further exercise,” we held that “a failure to object

35a

does not amount to evidence of waiver.” 407 F.3d at

1361 (modifications in original). Similarly, the

Assistance Agreement in this case contains a non-

waiver provision stating that “{a]ny forbearance or

failure or delay by any party in exercising or

partially exercising any right, power, or remedy,

shali not preclude its further exercise.” Assistance

Agreement § 15. Therefore, the plaintiffs’ fleeting

reference of the government’s delay, see Appellee Br.

3, does not provide evidence of the government’s

waiver of its prior material breach defense.5

Even without the non-waiver provision, we

disagree with the finding of the Court of Federal

Claims that “the Government continued to accept

LISB’s performance under the contract” after

discovery of Conway’s fraudulent scheme. The Court

of Federal Claims did not substantiate its finding,

and we can find no evidence of continued government

acceptance of LISB’s performance in the briefs to the

Court of Federal Claims. The record indicates that

all of the government’s obligations under the

Assistance Agreement were completed before the

disclosure of the fraud. See U.S. Summ. J. Mot. 19-

20, Apr. 17, 2001. The plaintiffs’ argument that the

government’s refusal to take the thrifts back

amounts to continued performance, see Pls.’ Summ.

J. Opp’n 53-54, May 3, 2001, conflates a contractor's

claim for recission with a contractor’s assertion that

the government waived a prior material breach

affirmative defense. And the plaintiffs’ citations to

the record do not support their assertion that the

5 We note as well that the plaintiffs do not appear to dispute

the government's summary of this case’s procedural history,

which shows that the government filed its affirmative defenses

and counterclaims before the time negotiated by the parties.

36a

government continued to accept performance under

the Assistance Agreement after discovery of the

fraud. See Pls.’ Summ. J. Supplemental 21 n. 12,

Jun. 18, 2001 (citing government minutes and a

government report from 1990); Appellee Br. 42

{stating that plaintiffs informed the government of

Conway’s law firm compensation arrangement, at

the earliest, in September 1992).

Therefore, the plaintiffs have not shown that the

government waived its prior material breach

defense, and LISB’s false certification constitutes an

uncured material failure of performance that

provides an independent basis for precluding the

plaintiffs’ claim for damages.

IV.

The plaintiffs argue in their combined petition

for rehearing and rehearing en banc that holding in

favor of the government in this case is “strikingly

inequitable.” In an analogous case holding a contract

unenforceable against the government because the

government contracting agent violated a conflict of

interest statute, however, the Supreme Court stated:

The Court of Claims was of the opinion that

it would be overly harsh not to enforce this

contract, since the sponsors could not have

controlled Wenzell’s activities and were

guilty of no wrongdoing. However, we think

that the court emphasized the wrong

considerations. Although nonenforcement

frequently has the effect of punishing one

who has broken the law, its primary purpose

is to guarantee the integrity of the federal

contracting process and to protect the public

from the corruption which might lie

37a

undetectable beneath the surface of a

contract conceived in a tainted transaction.

Miss. Valley, 364 U.S. at 564-65; see also Godley, 5

F.3d at 1475 (citing Miss. Valley in stating that

“general rule [of a government contract tainted by

fraud or wrong-doing is void ab initio] protects the

integrity of the federal contracting process and

safeguards the public from undetectable threats to

the public fisc”). Moreover, contract law provides for

other theories of recovery. See, e.g., Miss. Valley, 364

U.S. at 566 n. 22 (discussing quantum valebat

recovery). Here, the plaintiffs assert that they seek

“only contract damages.” Appellee Br. 3. The

plaintiffs’ argument based on the equities is thus

unpersuasive.

V.

For the reasons discussed above, we reverse the

judgment of the Court of Federal Claims. Since we

hold that the contract is void ab initio, and that the

doctrine of prior material breach provides the

government with a _ legal excuse ffor its

nonperformance, we do not reach the issue of federal

common law fraud making the contract voidable or

the issues of damages.

REVERSED

Each party shall bear its own costs for this

appeal.

38a

APPENDIX B

{Initial Opinion of the United States Court Of

Appeals for the Federal Circuit (Feb. 1, 2007)]

United States Court of Appeals, Federal Circuit.

The LONG ISLAND SAVINGS BANK, FSB, and

the Long Island Savings Bank of Centereach FSB,

Plaintiffs-Appellees,

v.

UNITED STATES, Defendant-Appellant.

No. 2006-5029.

Feb. 1, 2007.

Before MAYER, GAJARSA, and LINN, Circuit

Judges.

GAJARSA, Circuit Judge.

In this Winstar-related case, the United States

appeals a decision of the United States Court of

Federal Claims granting a motion for summary

judgment by the Long Island Savings Bank, FSB

(““LISB”) and the Long Island Savings Bank of

Centereach FSB (“Centereach”) on the government’s

counterclaim and affirmative defenses. Long [sland

Sav. Bank, FSB v. United States (LISB Summ. J.),

54 Fed. Cl. 607 (2002). The United States also

appeals the decision of the Court of Federal Claims

after trial awarding breach of contract damages to

LISB and Centereach in the amount of $435,755,000.

Long Island Sav. Bank, FSB v, United States (LISB

Trial), 67 Fed. Cl. 616 (2005). Because we hold the

claims against the government to be forfeited under

28 U.S.C. § 2514, we reverse.

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I. BACKGROUND

This case is another of the many Winstar-cases

arising from the savings and loan crisis of the 1980s.

See generally United States v. Winstar Corp., 518

U.S. 839 (1996). The facts and procedural history

pertinent to this appeal follow.

A, The Parties and the Contract

In April 1982, the Federal Savings and Loan

Insurance Corporation (“FSLIC”) created Suffolk

County Federal Savings and Loan Association

(“Suffolk County”) by merging two thrifts on Long

Island that were incurring significant operating

losses. LISB Trial, 67 Fed. Cl. at 619. In October

1982, FSLIC undertook a national solicitation for

potential acquirers of Suffolk County because its

financial condition continued to decline. Jd. at 620.

FSLIC determined that of the six bids received, the

bid from LISB, a conservatively run and healthy

thrift bank with branches in New York state, was the

most favorable. Jd. at 621. Negotiations began, and

the parties executed a final Assistance Agreement on

August 17, 1983. Id.

Under the Assistance Agreement, Suffolk County

converted “from a federal mutual savings and loan

association into a federal stock savings bank” and

changed its name to Centereach, LISB acquired

Centereach as a wholly owned subsidiary, and the

government made a direct cash contribution of $75

million to Centereach’s net worth. (Assistance

Agreement at 1; id. § 3.) In addition, the government

agreed that LISB and Centereach could use “the

accounting principles in effect for mergers and

acquisitions prior to the issuance of FASB # 72” to

account for the acquisition. (Jd. § 10.) Those

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accounting principles enabled Centereach to account

for approximately $625.4 million of goodwill to be

amortized over forty years by the straight-line

method. LISB Trial, 67 Fed. Cl. at 622. See generally

Winstar, 518 U.S. at 853-56 (describing goodwill

accounting allowed by FSLIC and advantages to

acquiring institutions).

The Assistance Agreement conditioned FSLIC’s

obligations on, inter alia, FSLIC’s “receipt of a

certificate, dated as of the Purchase Date, signed by

the Chairman of the Board of LISB, stating that” the

“representations and warranties of LISB set forth in

§ 11(b) are true and substantially correct as of the

Purchase Date.”(Assistance Agreement § 2(c)(7).) Of

pertinence here, LISB represented and warranted in

section 11(b)(5) (emphasis added) the following:

Compliance With Law. Except as disclosed in

Exhibit G, LISB is not in violation of any

applicable statutes, regulations or orders of,

or any restrictions imposed by, the United

States of America or any state, municipality

or other political subdivision or any agency of

the foregoing public units, regarding the

conduct of its business and the ownership of

its properties, including without limitation,

all applicable statutes, regulations, orders

and restrictions relating to savings and lean

associations, equal employment

opportunities, employment retirement

income security, and environmental

standards and controls where such violation

would materially and adversely affect LISB’s

business, operations or condition, financial or

otherwise.

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LISB also represented and warranted in section

11(b)(9) (emphasis added):

Maierial Facts. This Agreement and all

information furnished by LISB in connection

with this Agreement or the Master Agreement

do not contain any untrue statement of a

material fact or omit to state a material fact

necessary to be stated in order to make the

statements contained therein not misleading;

and there is no fact which materially

adversely affects or in the affect the business

operation, affairs or condition, financial or

otherwise, of LISB or any of its properties or

assets which has not been set forth in this

Agreement, the Master Agreement or the

other documents furnished under either

Agreement.

It is undisputed that LISB’s Chairman certified

to the government that the “representations and

warranties of LISB set forth in § 11(b) are true and

substantially correct” as required by § 2(c)(7) of the

Assistance Agreement.

Section 16 specified that “[t]his Agreement and

the rights and obligations under it shall be governed

by the law of the State of New York to the extent

that Federal law does not control.”

B. Conway and his Law Firm Compensation

LISB and Centereach entered into the Assistance

Agreement through their Chairman of the Board of

Trustees and CEO James J. Conway, Jr. (Assistance

Agreement at 31.) During his tenure at LISB and

Centereach, Conway also received compensation

from the law firm Conway & Ryan. The banks agree

that Conway & Ryan was their “primary outside

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counsel” that “performed mortgage closing services

and occasionally represented [LISB] in foreclosure

proceedings” and that a “substantial portion” of the

law firm’s revenues were from the banks’ mortgage

closing services. The parties’ summary judgment

submissions show that the law firm, starting in 1980

and ending with the firm’s dissolution in 1992,

derived at least 70% of its revenues from LISB.

Conway, an attorney admitted to the New York

state bar, had worked for the law firm since 1953.

Conway became a member of LISB’s Board of

Trustees in 1966 and the Chairman in 1976. In

1980, Conway received two legal opinions, one

provided unsolicited by a partner at the law firm and

one solicited by Conway from an outside attorney,

stating that New York law prohibited him from

receiving compensation from the law firm for legal

services relating to any of the banks’ loans.

In January 1982, the Board elected Conway to be

LISB’s CEO. After becoming CEO of LISB, Conway

stopped practicing law and engaging in other

professional services for the law firm. However,

Conway continued to receive compensation from the

law firm, and the banks agree that “Conway’s

compensation included revenues received by [the law

firm] for performing” the “banks’ mortgage closing

services.” From September 1975, when Conway &

Ryan was incorporated as a New York professional

corporation, to December 1984, Conway owned 65%

of the law firm. Accordingly, Conway received at

least 60% of the law firm’s income for the fiscal years

ending in August 1981, 1982, and 1983.

In December 1984, Conway reduced his

ownership interest to 9% by, in part, transferring

51% of the law firm to his daughter. Around that

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time, Conway had become aware of a thrift

regulation restricting his ownership interest in the

law firm to less than 10%. Conway retained his 9%

ownership interest until December 1989. Conway,

his daughter, and his daughter in-law collectively,

however, continued to own at least 60% of the law

firm. Accordingly, while Conway received between

9% and 40% of the law firm’s annual income after

1984, Conway, his daughter, and his daughter-in-law

collectively received at least 60% annually, except for

the fiscal year ending in August 1985 when they

received 51%.

Between 1980 and 1989, Conway personally

received at least $3.5 million from the law firm.

Collectively, Conway, his daughter, and his

daughter-in-law received at least $10.9 million from

the law firm during the same time period.

While there were multiple opportunities, neither

Conway nor LISB disclosed this compensation from

the law firm during this time period. In December

1981, LISB “applied for conversion from a state-

chartered mutual savings bank to a Federal mutual

savings bank charter.” To determine eligibility for

conversion, the Federal Home Loan Bank Board

(“FRLBB”) required LISB to answer a management

questionnaire, and LISB’s president “stated that he

[wa]s aware that approval of the application to

convert wiould] require that [LISB] adhere to

various Federal and Insurance Regulations.” LISB

submitted, inter alia, the following responses (in

italics) in February 1982.

6. List each enterprise doing business with

the institution in which any of the

institution’s personnel have a direct or

indirect interest. If such enterprise has had

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any business. transactions with the

institution since the last examination,

indicate the nature of the interest and the

volume and type of business involved. If the

association provides space, employees,

equipment, services, or expenses, explain the

arrangement in full.

Officer James J. Conway, Jr. retains an

interest in a law firm that presently renders

service to the Bank and receives remuneration

from outside income of said firm.

kkk

9. List any affiliated person of the institution

who receives any commission, fee, or rebate

from outside sources, or benefits, directly or

indirectly, from financing or any other

business placed through, by, or with the

institution, if such information has not been

furnished in response to questions six (6),

seven (7), and eight (8). Name such persons

and state the amount and purpose of, and the

basis and reasons for, such disbursements,

credits or other benefits.

NONE

In February 1983, July 1984, and April 1986,

LISB submitted the same answers regarding

Conway in response to subsequent FHLBB

examinations. In December 1987, FHLBB employed

a different management questionnaire, but LISB

continued to respond that Conway “retains an

interest in a law firm that presently renders service

to the Bank and receives remuneration from outside

income of said firm.”

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C. Enactment of FIRREA

On August 9, 1989, the Government enacted the

Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (“FIRREA”), Pub. L. No.

101-73, 103 Stat. 183 (1989), which restricted

Centereach’s ability to count supervisory goodwill

and capital credit toward compliance with its

tangible capital requirement. As the Supreme Court

noted in Winstar, 518 U.S. at 857, “[t]he impact of

FIRREA’s new _ capital requirements upon

institutions that had acquired failed thrifts in

exchange for supervisory goodwill was swift and

severe.” Many institutions fell out of compliance and

were either seized by government regulators or

stayed in business only after “massive private

recapitalization.” Id. at 857-58.

“With FIRREA, Centereach’s capital ratio

plummeted from more than 8% positive to a negative

11 %.” LISB Trial, 67 Fed. Cl. at 623. In addition,

the Federal Deposit Insurance Corporation

Improvement Act of 1991 (“FDICIA”), Pub.L. No.

102-242, 105 Stat. 2236 (1991), established sanctions

through regulation to _ institutions deemed

undercapitalized. The management of LISB and

Centereach thus embarked on a restructuring plan,

which involved selling branches, securities, and

loans, paying down other borrowings, merging LISB

and Centereach, and writing off goodwill. LJSB

Trial, 67 Fed. Cl. at 625, 627-28.

Several institutions sued the government

“(bjelieving that [FHLBB] and FSLIC had promised

them that the supervisory goodwill created in their

merger transactions could be counted toward

regulatory capital requirements,” and the Supreme

Court subsequently held in Winstar that neither the

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canon of unmistakeability nor the doctrine of

sovereign acts prevented the government from being

liable for breaching contracts by subsequently

changing the relevant law. 518 U.S. at 843, 858,

860.

D. Complaint Against the Government, the

Discovery of Conway’s Law Firm

Compensation, and the Government’s

Affirmative Defenses

With the enactment of FIRREA, Conway hired

an outside law firm to advise the banks. See Doe v.

Poe, 595 N.Y.S.2d 503, 189 A.D.2d 132 (N.Y. App.

Div. 1993). In February 1990, Conway, the banks’

president, the outside law firm, and another outside

law firm that Conway had hired for the banks met to

discuss a lawsuit by the banks against the

government. The outside law firms “suggested that,

in preparation for the pending Federal litigation and

upcoming regulatory inspections, they conduct a ‘due

diligence’ inquiry to determine whether the bank{s

were] in compliance with all regulatory

requirements.” Conway and the president of the

banks agreed. See id. at 503-04. In two meetings

that year, the outside law firms discovered the law

firm compensation that Conway was receiving, and

in August 1990, advised Conway to retain his own

counsel. See id. at 504. “Sometime thereafter, a

special committee of the bank[s’] board of trustees

was formed to investigate the relationship between

[Conway], his family, and his former law firm.” Jd.

Conway attempted, but failed, to enjoin the outside

law firms from disclosing to the committee the

information learned from the meetings based on

attorney-client privilege. See id. at 504-05.

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The banks assert that they “timely informed OTS

of Conway’s relationship with fhis law firm] upon

learning the facts and filed a criminal referral with

OTS and other law enforcement agencies.” In June

1992, Conway resigned from LISB and Centereach.

In August 1992, LISB and Centereach filed a

complaint against the government in the Court of

Federal Claims alleging that the government

breached its contractual obligations by enacting

FIRREA.

In February 1993, OTS commenced an

investigation into Conway’s law firm compensation.

In February 1994, OTS and Conway entered into a

consent order. Based on its findings, OTS concluded

that Conway “engaged in violations of federal

conflict-of-interest and disclosure regulations,

participated in conflicts of interest constituting an

unsafe or unsound practice within the meaning of 12

C.F.R. § 571.7, and breached his fiduciary duty owed

to LONG ISLAND SAVINGS.” “[W]hile neither

admitting or denying the OTS’ findings and

conclusions,” Conway stipulated and consented to

the order banning him from the thrift and banking

industry and requiring him to pay $1.3 million in

restitution to LISB.

In February 1998, Conway pled guilty to a

criminal misdemeanor information charging him

with violating 18 U.S.C. § 215.! Specifically, Conway

agreed with the following facts: “[i]n his capacity as

chief executive officer and Chairman of LISB, ...

[Conway] influenced whether LISB continued to use

1 18 U.S.C. § 215 is a criminal statute governing the receipt of

commissions or gifts for procuring loans by an “officer, director,

employee, agent, or attorney of a financial institution.”

48a

the law firm as its legal counsel for residential

mortgage closings”; “[f]rom 1983 through 1989, while

holding his executive LISB positicns, [Conway]

received $3,194,103.87 in compensation from the law

firm”; and “[iJn or about and between September 3,

1986, and October 30, 1987, ... [Conway] knowingly,

intentionally and corruptly solicit[ed], demanded,

accepted and agreed to accept ... funds from the law

firm paid directly to him, ... intending to be

influenced and rewarded in connection with ... the

assignment of the LISB residential mortgage closing

work to the law firm.”

This conviction led the New York Supreme

Court, Appellate Division, to disbar Conway for

professional misconduct in August 2000. In re

Conway, 712 N.Y.S.2d 610, 275 A.D.2d 24 (2000).

Specifically, the court found:

The mitigating circumstances proffered by

the respondent notwithstanding, the fact

remains that, while chairman of the board

and chief executive officer of a savings bank,

he engaged in a scheme of illegal kickbacks,

using his daughter and daughter-in-law as

conduits to circumvent Federal law

prohibiting him from receiving compensation

from his former law firm, which relied on the

bank for approximately 90% of its business.

The payments were substantial, totalling

[sic] more than three million dollars. Such

misconduct, which went on for several years,

can hardly be deemed aberrational.

Id. at 611.

In February 2001, the government filed its

answer to the complaint in the Court of Federal

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Claims, including affirmative defenses and

counterclaims asserting prior material breach and a

special plea in fraud.

E. Proceedings Before the Court of Federal

Claims

On December 9, 2002, the Court of Federal

Claims decided in favor of LISB and Centereach on

the parties’ cross-motions for summary judgment on

the government’s counterclaims and affirmative

defenses. LISB Summ. J., 54 Fed. Cl. 607.

Specifically, the Court of Federal Claims found that

there was no prior material breach by LISB, id. at

614, and that the government’s special plea in fraud

failed because the government did not establish

either that LISB had knowledge of the Conway’s

misrepresentation or that Conway’s conduct should

be imputed to LISB, id. at 617-19.

On September 15, 2005, after a twenty-four day

trial, post-trial briefing, and closing arguments, the

Court of Federal Claims issued its opinion and order

holding the government liable and awarding

$435,755,000 in damages to LISB and Centereach.

LISB Trial, 67 Fed. Cl. at 618.

The government appeals the granting of

summary judgment regarding its affirmative

defenses in favor of LISB and Centereach in LISB

Summ. J, and the determination of damages in LISB

Trial. The Court of Fedéral Claims exercised

jurisdiction pursuant to the Tucker Act, 28 U.S.C. §

1491(a)(1), and entered final judgment on September

30, 2005. We have jurisdiction pursuant to 28 U.S.C.

§ 1295(a\(3).

II. STANDARD OF REVIEW

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The Court of Federal Claims applies the same

summary judgment standard as that of federal

district courts: summary judgment is proper if the

evidence demonstrates that “there is no genuine

issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.”

See Ct. Fed. Cl. R. 56(c); Fed. R. Civ. P. 56(c); see

also Celotex Corp. v, Catrett, 477 U.S. 317, 322-23,

(1986); SmithKline Beecham Corp. v. Apotex Corp.,

403 F.3d 1331, 1337 (Fed. Cir. 2005). Therefore, we

review a grant of summary judgment by the Court of

Federal Claims de novo, drawing justifiable factual

inferences in favor of the party opposing the

judgment. SmithKline, 403 F.3d at 1337; Winstar

Corp. v. United States, 64 F.3d 1531, 1539 (Fed. Cir.

1995) (en banc). Once the moving party has satisfied

its initial burden, the opposing party must establish

a genuine issue of material fact and cannot rest on

mere allegations, but must present actual evidence.

Anderson v, Liberty Lobby, Inc., 477 U.S. 242, 248

(1986). Issues of fact are genuine only “if the

evidence is such that a reasonable jury could return

a verdict for the nonmoving party.” Id.

Ill, DISCUSSION

The Court of Federal Claims held on summary

judgment that the government’s special plea in fraud

under 28 U.S.C. § 2514 did not mandate that the

claims of LISB and Centereach be forfeited. LISB

Summ. J., 54 Fed. Cl. at 614-20. Section 2514

provides that:

A claim against the United States shall be

forfeited to the United States by any person

who corruptly practices or attempts to

practice any fraud against the United States

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in the proof, statement, establishment, or

allowance thereof.

In such cases the United States Court of

Federal Claims shall specifically find such

fraud or attempt and render judgment of

forfeiture.

Where a plaintiff commits fraud “in regard to the

very contract upon which the suit is brought, this

court does not have the right to divide the contract

under which he practiced fraud against the

Government” and “all of his claims under that

contract will be forfeited pursuant to 28 U.S.C. §

2514.” Little v. United States, 138 Ct. Cl. 773, 152 F.

Supp. 84 (1957).

A. Burden of proof

We have “explained that ‘[t]o prevail under [§

2514], the government is required to establish by

clear and convincing evidence that the contractor

knew that its submitted claims were false, and that

it intended to defraud the government by submitting

those claims.” Glendale Fed. Bank, FSB v. United

States, 239 F.3d 1374, 1379 (Fed. Cir. 2001) (quoting

Commercial Contractors, Inc. v. United States, 154

F.3d 1357, 1362 (Fed. Cir. 1998)); cf. Young-

Montenay, Inc. v. United States, 15 F.3d 1040, 1042

(Fed. Cir. 1994) (“Under 28 U.S.C. § 2514, the

government bears the burden of proving that the

claimant (1) knew the claim was false and (2)

intended to deceive the government by submitting

it.”).

The parties do not dispute that the government

must prove the Glendale elements of (1) knowledge

of submission of false claims and (2) intent to

defraud. There appears to be some uncertainty,

52a

however, in the Court of Federal Claims as to

whether the government must also prove the

common law elements of fraud. Specifically, the

Court of Federal Claims observed in this case that §

2514 does not define the applicable elements of fraud

and noted that it has used the Glendale elements in

some cases and the common law fraud elements in

other cases. LISB Summ. J., 54 Fed. Cl. at 615. Use

of common law fraud elements adds to the

government's burden the elements of (3) justifiable

reliance and (4) injury. See id. Neither the Supreme

Court nor this court has addressed whether the

government must also prove these additional

common law elements under § 2514.

Requiring proof of justifiable reliance and injury

under § 2514 appears to originate in Colorado State

Bank of Walsh v. United States, 18 Cl. Ct. 611 (1989),

a decision of the Claims Court, which is now the

Court of Federal Claims.2 See LISB Summ. J., 54

Fed. Cl. at 615; First Fed. Bank of Hegewisch v.

United States, 52 Fed. Cl. 774, 789-90 (2002);

Landmark Land Co., Inc. v. United States, 46 Fed.

Cl. 261, 274 (2000); BMY-Cumbat Sys. Div. of Harsco

Corp. v. United Stutes, 38 Fed. Cl. 109, 128 (1997).

The Colorado State Bank court found that we

“approached the issue of fraud in forfeiture of claims

cases on a case-by-case basis, and applied the

common law elements of fraud.” 18 Cl. Ct. at 629.

While citing no cases requiring justifiable reliance,

the Colorado State Bank court cited Crovo v. United

2 As noted in Winstar, 64 F.3d at 1534 n. 2, “[t]he Federal

Courts Administration Act of 1992, Pub. L. No. 102-572, §

902(a), 106 Stat. 4506, 4516, changed the name of the former

United States Claims Court to the ‘United States Court of

Federal Claims.”

53a

States, 100 Ct. Cl. 368 (1943), for the proposition

that there could be no § 2514 forfeiture without

injury. 18 Cl. Ct. at 629 n. 17.

In Crovo, however, our predecessor court did not

hold that § 2514 required proof of government injury.

Rather, Crovo stated that “[a]lthough it is not

necessary to show a pecuniary loss to defeat a

fraudulent claim, it is necessary to do so where a

claim has been paid and an action is brought to

recover the amount paid.” 100 Ct. Cl. at 368. Crovo

also noted that the latter action would not be

brought under § 2514.

Nor does section [2514] provide for an action

to recover money paid on a false claim. The

only remedy given the Government by this

section is the forfeiture of the claim, and in

consequence the relief of the Government

from liability therefor. After payment there is

no claim to be forfeited. It may be the

Congress might have provided for a suit

against a claimant who had been paid on a

false claim, if it had thought of it, but it has

not done so.

100 Ct. Cl. at 368. Therefore, Colorado State Bank

and its Court of Federal Claims progeny are based on

a legal misinterpretation of our precedent, which

states explicitly that “i. is not necessary to show a

pecuniary loss to defeat a fraudulent claim” under §

2514. 100 Ct. Cl. at 368.

There is no language in the plain meaning of the

statute that would impose requirements of reliance

and injury, especially when used as an affirmative

defense rather than as a cause of action, and we have

found nothing in the legislative history of the

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original Court of Claims Act that iisdicates

otherwise. Indeed, Congress’s objective to “guard

against ... frauds in the claims in the couri” and to

impose forfeiture “as a preventative and a penalty”

in § 2514 would seem to point against requiring

reliance and injury. O’Brien Gear & Mach. Co. v.

United States, 219 Ct. Cl. 187, 591 F.2d 666, 678

(1979) (adopting opinion of trial judge). However, we

need not go any further. The parties have not asked

us to extend Glendale to require justifiable reliance

and injury, and we perceive no reason to do so here.

Accordingly, for the government to prevail in its

special plea in fraud in this case, it must prove “by

clear and convincing evidence that the contractor

knew that its submitted claims were false, and that

it intended to defraud the government by submitting

those claims.” Glendale, 239 F.3d at 1379. The

government asserts that it has met this burden

because LISB certified that the representations and

warranties of the Assistance Agreement were true

and substantially correct.

B. Submitted claims

Section 2(c)(7) of the Assistance Agreement

conditioned the government’s obligations on the

receipt of a certificate “signed by the Chairman of the

Board of LISB stating,” inter alia, that the

“representations and warranties of LISB set forth in

§ 11(b) are true and substantially correct as of the

Purchase Date.” It is undisputed that Conway as

Chairman and CEO of LISB had the authority to

submit the certification and did so. LISB Summ. J.,

54 Fed. Cl. at 615-16. In addition, there is no

dispute that Conway’s conduct in submitting the

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certification should te imputed to LISB.3 Therefore,

the certification required by section 2(c)(7)

constituted a submitted claim to the government.

C. = Falsity

By submitting the certification, LISB certified

that the “representations and warranties of LISB set

forth in § 11(b) [we]re true and substantially correct

as of the Purchase date.” The falsity of the

certification thus depends on the representation and

warranty provisions of the contract.

LISB represented and warranted in section

11(b)(5) of the Assistance Agreement that it was “not

in violation of any applicable statutes, regulations or

orders.” The government argued on appeal that the

contract thus required LISB to comply with 12

C.F.R. § 563.17(a) (1984), which provided that LISB

and Centereach “shall maintain safe and sound

management.” In addition, the regulations charged

FHLBB with “the enforcement of laws, regulations,

or conditions against ... the officers or directors,” 12

C.F.R. § 500.3 (1984), and FHLBB required that

officers refrain from breaching fiduciary duties

involving personal profit, see 12 C.F.R. § 563.39

(1984) (“Termination for cause shall include

termination because of ... breach of fiduciary duty

involving personal profit.”).

In this case, the Court of Federal Claims found

that “Conway and his firm’s impropriety under

3 Neither LISB nor Centereach have raised any issues

regarding the Assistance Agreement requiring the certification

of the Chairman of LISB but not of Centereach. Indeed, for

purposes of the special plea in fraud, all of the parties have

treated LISB and Centereach as the same in this appeal.

Therefore, we do so as well.

56a

banking laws is evident.” LISB Summ. J., 54 Fed. Cl.

at 614. Similarly, “based on its findings from the

Investigation, the OTS” concluded that Conway

“preached his fiduciary duty owed to” LISB. As a

result, Conway consented to an order that banned

him from the thrift and banking industry and that

required him to pay $1.3 million in restitution and

reimbursement to LISB. The banks concede that

Conway’s compensation from the law firms during

the time he was Chairman and CEO of LISB and

Centereach, between at least 1982 and 1989,

“included revenues received by [the law firm] for

performing” the “banks’ mortgage closing services.”

Moreover, by pleading guilty to violating 18 U.S.C. §

215, Conway admitted that he committed a crime by

corruptly accepting $3,194,103.87 in compensation

from the law firm intending to be influenced and

rewarded for “the assignment of the LISB residential

mortgage closing work to the law firm.” Therefore,

we agree that Conway breached his fiduciary duties

to LISB and Centereach and profited personally from

that breach.

Nonetheless, the Court of Federal Claims found

that LISB was not operating in an unsafe and

unsound manner under 12 C.F.R. § 563.17. The

Court of Federal Claims reasoned that “had Conway

not accepted compensation related to mortgage

closing services of LISB’s borrowers, but the

relationship between LISB and the firm was

otherwise the same, no impropriety would exist.”

LISB Summ. J., 54 Fed. Cl. at 614. By focusing

solely on the relationship between LISB and the law

firm, the Court of Federal Claims improperly ignored

the relationship between Conway and both LISB and

Centereach. Specifically, the Chairman of the Board

and CEO of LISB and Centereach breached his

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fiduciary duties for personal profit. This is not safe

and sound management. Even if it were unclear

whether Conway’s conduct precluded a finding of

safe and sound management, LISB represented and

warranted in section 11(b)(9) of the Assistance

Agreement that it would not “omit to state a material

fact necessary to be stated in order to make the

statements contained therein not misleading.” At a

minimum, Conway’s conduct was a material fact

necessary to make LISB’s_ section 11(b)(5)

representation and warranty of compliance with law,

including safe and sound management, not

misleading.

Accordingly, LISB’s_ certification to the

government regarding the “true and substantially

correct” nature of the representations and

warranties made in the Assistance Agreement was

false.

D. Knowledge

The Court of Federal Claims found that

“[ajlthough LISB knew Conway was being

compensated by his firm, this Court cannot conclude

that [others at] LISB knew that the arrangement

was improper, and, therefore, a misrepresentation.”

LISB Summ. J., 54 Fed. Cl. at 616-17. We see no

error in this factual conclusion. The critical inquiry

thus becomes whether Conway’s knowledge of the

certification’s falsity is imputed to LISB.

1. Law of knowledge imputation

Whether federal common law or state law applies

to imputation of knowledge under 28 U.S.C. § 2514 is

a question of first impression. In O’Melveny & Myers

v. FDIC, 512 US. 79 (1994), the Supreme Court held

that state law governs issues of knowledge

08a

imputation when the FDIC sues as receiver of a

corporation under causes of action created by state

law. The Court reasoned (1) that FIRREA, which

empowered the FDIC as receiver, did not preempt

state imputation law and (2) that judicial creation of

a special federal rule was not justified because there

was no significant conflict between a federal policy or

interest and the use of state law. See id. at 85-89; cf.

Atherton v. FDIC, 519 U.S. 213 (1997) (holding that

state law, not federal common law, governed legal

standard of care owed to federally chartered,

federally insured institutions). In this case, however,

federal law may govern the breach of contract action.

See Franconia Assocs. v. United States, 536 U.S. 129,

141-43 (2002) (applying principles of general contract

law by relying in part on Restatement (Second) of

Contracts (1979) to determine whether contract

claim against federal government was within Tucker

Act statute of limitations); cf. Wagner Iron Works v.

United States, 146 Ct. Cl. 334, 174 F.Supp. 956, 958

(1959). In addition, there may be a significant

federal interest in specifying the knowledge

imputation rules applicable to 28 U.S.C. § 2514

because § 2514 “is one of the conditions on which the

Government gives its consent to be sued and waives

its otherwise sovereign immunity.” Kamen Soap

Prods. Co. v. United States, 129 Ct. Cl. 619, 620

(1954). Indeed:

The source of present-day section 2514 of

Title 28 is the Court of Claims Act of March

3, 1863, ch. 92, 12 Stat. 765. This statute

transformed the Court of Claims from a body

merely advisory to Congress into a court with

power to entertain claims, subject to a

statute of limitations, hear the Government’s

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counterclaims and enter judgments to be

paid out of a general appropriation.

O’Brien, 591 F.2d at 678. As such, the law governing

the elements of § 2514 influences the scope of the

federal government’s waiver of sovereign immunity.

Under the general common law of agency,

“[e]xcept where the agent is acting adversely to the

principal... the principal is affected by the

knowledge which an agent has a duty to disclose to

the principal ... to the same extent as if the principal

had the information.” Restatement (Second) of

Agency § 275 (1958); cf. Comty. For Creative Non-

Violence v. Reid, 490 U.S. 730, 751-52 (1989) (relying

on Restatement (Second) of Agency to determine

whether hired party is employee under general

common law of agency for Copyright Act purposes);

Franconia, 536 U.S. at 141-43 (applying principles of

general contract law by relying in part on

Restatement (Second) of Contracts (1979) on contract

claim against federal government). The Restatement

(Second) of Agency § 282 (1958) specifies when an

agent is acting adversely to the principal:

(1) A principal is not affected by the

knowledge of an agent in a transaction in

which the agent secretly is acting adversely

to the principal and entirely for his own or

another's purposes, except as stated in

Subsection (2).

(2) The principal is affected by the knowledge

of an agent who acts adversely te the

principal:

(a) if the failure of the agent to act upon or

to reveal the information results in a

violation of a contractual or relational duty

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of the principal to a person harmed

thereby;

(b) if the agent enters into negotiations

within the scope of his powers and the

person with whom he deals reasonably

believes him to be authorized to conduct

the transaction; or

(c) if, before he has changed his position,

the principal knowingly retains a benefit

through the act of the agent which

otherwise he would not have received.

In addition, the “mere fact that the agent’s primary

interests are not coincident with those of the

principal does not prevent the latter from being

affected by the knowledge of the agent if the agent is

acting for the principal’s interests.” Restatement

(Second) of Agency § 282 cmt. c.

New York state law has similar standards for the

general rule of imputation and the adverse interest

exception:

In general, knowledge acquired by an agent

acting within the scope of his or her agency is

imputed to the principal and the latter is

bound by that knowledge even if the

information is never actually communicated.

An exception to this rule occurs when the

agent has abandoned his or her principal’s

interests and is acting entirely for his or her

own or another’s purposes.

Christopher S. v. Douglaston Club, 713 N.Y.S.2d 542,

275 A.D.2d 768 (N.Y. App. Div. 2000) (citing Center

v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 488

N.E.2d 828, 829-30 (N.Y. 1985)). The adverse

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interest exception “cannot be invoked merely because

he has a conflict of interest or because he is not

acting primarily for his principal.” Center, 488

N.E.2d at 830 (citations omitted). However, the

general principles of agency and New York state law

may diverge on the exceptions enumerated in

Restatement (Second) of Agency § 282(2) to the

adverse interest exception. Specifically, we have

found New York precedent only for § 282(2)(c).

While there may be differences between federal

common law and state law, it seems to us imprudent

to resolve the question of which law applies to

knowledge imputation under 28 U.S.C. § 2514

without briefing. Moreover, we can resolve this case

based on where federal and state laws are the same.

Namely, the general rule of imputation, the adverse

interest exception, and the Restatement (Second) of

Agency § 282(2)(c) exception to the adverse interest

exception.

Under the general rule of imputation, it is

undisputed that Conway was an agent of the banks

and had knowledge of his compensation scheme.

Therefore, the first step indicates that Conway’s

knowledge should generally be imputed to the banks,

and we proceed to examine whether the adverse

interest exception or its exception applies.

2. Adverse interest exception

The Court of Federal Claims found that Conway

“ha({d] abandoned his principal's interest and [wals

acting to defraud his principal, entirely for his own

or another’s purpose” because “had the knowledge

that the Government seeks to impute to LISB

actually been disclosed to LISB, the success of

Conway’s scheme would have been impaired.” LISB

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Summ. J., 54 Fed. Cl. at 619. We do not agree with

this analysis or its conclusions.

It is true that Conway pursued his own interests

in his improper compensation arrangement with his

law firm. However, this conflict of interest does not

mean that Conway abandoned the banks’ interest

entirely. For example, by causing LISB to utilize the

law firm exclusively, Conway continued to serve

LISB’s interests in part by ensuring that its

representation requirements with mortgage loan

closings were met. In addition, by signing the false

certification under the Assistance Agreement,

Conway enabled LISB to acquire Centereach under

previously negotiated terms. In hindsight, LISB’s

interests probably would have been better served

had Conway not perpetrated his improper

compensation arrangement, but the record fails to

support the assertion that Conway entirely

abandoned LISB’s interests for his own.

Accordingly, the Court of Federal Claims erred in

finding that the adverse interest exception should

apply to preclude imputation to LISB. See

Restatement (Second) of Agency § 282 rptr.’s note

(“Whether the agent’s interests are sufficiently

adverse to bring the rule into operation is a question

to be decided by the triers of fact.”).

3. Restatement (Second) of Agency § 282(2)(c)

exception

Even if the adverse interest exception were to

apply, Conway’s knowledge would be imputed to

LISB if “the principal knowingly retains a benefit

through the act of the agent which otherwise he

would not have received.” Restatement (Second) of

Agency § 282(2)(c); see also In re Maxwell

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Newspapers, Inc., 164 B.R. 858, 867 (Bankr. S.D.N.Y.

1994) (“As the Tenth Circuit so aptly put it, ‘If the

principal disclaims the agent’s acts as unauthorized,

he has no grounds to retain the fruits thereof; on the

other hand, if he retains the fruits of the agent’s acts,

after knowledge of the facts, he must in fairness be

charged with the agent’s knowledge.” (citations

omitted)); Zanoni v, 855 Holding Co., Inc., 465

N.Y.S.2d 763, 764-65, 96 A.D.2d 860 (N.Y. App. Div.

1983) (“An agent’s fraud can be imputed to the

corporation, and a corporation will be deemed to

have ratified the agent’s acts, where, as here, it

retains the benefit of those acts for corporate

purposes.” (citations omitted)).

In this case, the certification signed by Conway

fulfilled an explicit provision of the Assistance

Agreement with the government and enabled LISB

to reap the contractual benefits. Indeed, the breach

of contract suit at issue is founded on that Assistance

Agreement, and thus, LISB and Centereach have

knowingly retained the benefits reaped by Conway’s

certification even after discovering its fraudulent

nature. In effect, the banks have ratified Conway’s

fraudulent certification, and we would impute

Conway’s knowledge of the certification’s falsity even

if the adverse interest exception were to apply.

Accordingly, LISB and Centereach knew by law

that the certification to the government was false.

E. Intent to defraud

For the same reasons that allow Conway’s

knowledge to be imputed to LISB and Centereach,

we can impute an intent to defraud from Conway.

Therefore, the question becomes whether Conway

had an intent to defraud the government in

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submitting the false certification under the

Assistance Agreement.

Where there is no direct evidence of intent to

defraud or to deceive, we find our case law in

analogous contexts instructive. “Intent need not be

proven by direct evidence; it is most often proven by

a showing of acts, the natural consequences of which

are presumably intended by the actor. Generally,

intent must be inferred from the facts and

circumstances surrounding the applicant’s conduct.”

Molins PLC v. Textron, Inc., 48 F.3d 1172, 1180-81

(Fed. Cir. 1995) (discussing affirmative patent

defense of inequitable conduct) (citations omitted);

see also In re Watman, 301 F.3d 3, 8 (1st Cir. 2002)

(noting that few cases turn on direct evidence of

intent and thus, looking instead to circumstances

and objective indicia in bankruptcy context).

The fact of misrepresentation coupled with

proof that the party making it had knowledge

of its falsity is enough to warrant drawing

the inference that there was a fraudulent

intent. Thus, circumstantial evidence may

permit an inference of intent. In determining

whether an inference of intent can be drawn

from circumstantial evidence, it is proper to

consider the degree of materiality of the

information.

Lipman vy. Dickinson, 174 F.3d 1363, 1370 (Fed. Cir.

1999) (discussing duty of candor patent applicants

owe to PTO) (citations omitted). But see

Nobelpharma AB v, Implant Innovations, Inc., 141

F.3d 1059, 1069-71 (Fed. Cir. 1998).

LISB and Centereach assert on appeal that the

government failed to offer any proof that Conway

65a

had an intent to defraud when failing to acknowledge

his law firm compensation in the Assistance

Agreement certification. This is incorrect for the

record demonstrates that Conway had knowledge of

the certification’s falsity. First, as discussed,

Conway certified under the Assistance Agreement

that there were no omissions of material fact

regarding LISB’s compliance with the law, including

the regulation requiring ‘safe and sound

management,” that would mislead the government.

Second, Conway received two legal opinions before

submitting the Assistance Agreement certification

stating that he was legally prohibited from receiving

compensation from the law firm for legal services

relating to any of the banks’ loans. Third, the banks

concede that Conway’s compensation from the law

firms during the time he was Chairman and CEO of

LISB and Centereach, between at least 1982 and

1989, “included revenues received by [the law firm]

for performing” the “banks’ mortgage closing

services.” Therefore, there was no error in the

finding of the Court of Federal Claims that Conway

entered into the Assistance Agreement “knowing his

conflicting dual relationship with his firm and LISB

prohibited him from entering into the Assistance

Agreement and from receiving compensation from

his firm.” LISB Summ. J., 54 Fed. Cl. at 615-16. This

record supports an inference of intent.

Moreover, the active breaching of fiduciary

duties by the Chairman of the Board and the CEO

constitutes material information when _ the

government undertakes a national solicitation for

potential acquirers of a _ declining financial

institution, contributes $75 million of cash to the

declining institution’s net worth, and conditions

performance on a representation and warranty of

66a

compliance with the law, including regulations

requiring “safe and sound management.” Indeed, the

government’s supervisory agent responsible for

recommending whether LISB’s_ acquisition of

Centereach should be approved in 1983 declared that

“{hjad Mr. Conway correctly and accurately revealed

the nature and substance of the kickback scheme ... I

would have recommended that we discontinue

discussions and negotiations with [LISB].” While

these assertions may be true, we hold that the

government need not prove that it would have

declined the contract had Conway disclosed the

information. Rather, the circumstances of this case

indicate that the government would have considered

it important in deciding whether to consummate the

contract. Cf. Liquid Dynamics Corp. v, Vaughan Co.,

Inc., 449 F.3d 1209, 1227 (Fed. Cir. 2006) (stating in

inequitable conduct patent context: “Our inquiry into

materiality is an objective one. ‘Materiality is not

limited to prior art but embraces any information

that a reasonable examiner would be substantially

likely to consider important in deciding whether to

allow an application to issue as a patent.” (citation

omitted)).

Our conclusion that Conway had an intent to

defraud is further supported by the facts

surrounding the Assistance Agreement. First,

neither Conway nor LISB accurately disclosed the

compensation from his law firm when prompted by

the government in February 1982, February 1983,

July 1984, April 1986, or December 1987. In each

instance, LISB responded that Conway “retains an

interest in a law firm that presently renders service

to the Bank and receives remuneration from outside

income of said firm.” This was false because, as the

banks concede, Conway’s compensation from the law

67a

firm “included revenues received by [the law firm] for

performing” the “banks’ mortgage closing services.”

In pleading guilty, Conway also admitted that: “{i]n

his capacity as chief executive officer and Chairman

of LISB, ... [Conway] influenced whether LISB

continued to use the law firm as its legal ccunsel for

residential mortgage closings”; “{f]rom 1983 through

1989, while holding his executive LISB positions,

[Conway] received $3,194,103.87 in compensation

from the law firm”; and “[i]n or about and between

September 3, 1986, and October 30, 1987,

[Conway] knowingly, intentionally and corruptly

solicit{ed], demanded, accepted and agreed to accept

... funds from the law firm paid directly to him, ...

intending to be influenced and rewarded in

connection with ... the assignment of the LISB

residential mortgage closing work to the law firm.”

LISB and Centereach attempt to minimize the

significance of Conway’s guilty plea, citing to his trial

testimony in this case where he explained that he

pled to protect his children. However, “a party

cannot simply contradict an _ earlier sworn

statement,” and there is no credible evidence here

supporting the contradiction. Cf. Gemmy Indus.

Corp. v. Chrisha Creations Ltd., 452 F.3d 1353, 1359

(Fed. Cir. 2006) (finding summary judgment grant

improper where credible evidence’ supported

contradiction).

Second, when the banks’ outside counsel,

ironically hired by Conway himself, discovered

Conway’s law firm compensation, Conway attempted

but failed to er‘oin the outside counsel from

disclosing the information to other bank personnel.

See Doe v. Poe, 595 N.Y.S.2d at 504-05.

68a

Therefore, under the circumstances of this case,

the only justifiable inference is that Conway had an

intent to defraud, and LISB and Centereach have not

presented evidence such that a reasonable jury could

return a verdict in their favor. See Anderson, 477

U.S. at 248 (stating that issues of fact are genuine

for summary judgment purposes only “if the evidence

is such that a reasonable jury could return a verdict

for the mnonmoving party”). Accordingly, the

government has proven its special plea in fraud by

clear and convincing evidence. Conway knew that

the certification he submitted under the Assistance

Agreement was false, Conway intended to defraud

the government b: submitting the certification, and

Conway’s knowledge and intent should be imputed to

LISB and Centereach.

IV. CONCLUSION

For the reasons discussed above, we reverse

judgment of the Court of Federal Claims. Since we

hold all asserted contract claims against the

government under the Assistance Agreement to be

forfeited under 28 U.S.C. § 2514, we do not reach

questions of damages.

REVERSED

No costs.

69a

APPENDIX C

[Opinion of the United States Court of Federal

Claims (Sept. 15, 2005)]

United States Court of Federal Claims.

THE LONG ISLAND SAVINGS BANK, FSB,

and The Long Island Savings Bank of Centereach

FSB, Plaintiffs.

Vv.

The UNITED STATES, Defendant.

No. 92-517-C.

Sept. 15, 2005.

OPINION AND ORDER

LETTOW, Judge.

INTRODUCTION

Both liability and damages remain unresolved in

this Winstar-related case.'! Plaintiffs are federal

savings banks or “thrifts” which allege that the

government breached a contract entered in 1983

involving the treatment of goodwill as regulatory

capital and that plaintiffs suffered expectancy and

reliance damages as a result of the breach. To

adjudicate the disputed issues of fact, the court

conducted a 24-day trial commencing on January 18,

2005 and ending on March 23, 2005. Post-trial briefs

were filed thereafter, and a closing argument was

1 See United States v. Winstar Corp., 518 U.S. 839 (1996).

70a

held on July 7, 2005. The case is now ready for

disposition.”

For the reasons set out below, the court finds

that the government entered into a contract with

plaintiffs providing for, among other things, the

recognition of goodwill amounting to approximately

$625.4 million in connection with the acquisition by

plaintiff The Long Island Savings Bank, FSB

(“Syosset”) of The Long Island Savings Bank of

Centereach FSB (“Centereach”) from the Federal

Savings and Loan Insurance Corporation (“FSLIC”)

with the participation of the Federal Home Loan

Bank Board (“FHLBB” or “Bank Board”). The

contract also provided for the use of push-down

accounting regarding the acquisition, for the

treatment of the goodwill as regulatory capital, and

for the amortization of the goodwill over a period of

forty years. The court additionally finds that this

contract was breached by the government upon the

enactment on August 9, 1989 of the Financial

Institutions Reform, Recovery, and Enforcement Act

(“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183

2 Previously, Senior Judge Margolis granted a motion by

plaintiffs for summary judgment on defendant's counterclaims

and affirmative defenses. Long Island Sav. Bank v. United

States, 54 Fed. Cl. 607 (2002). Subsequently, this court denied

cross-motions for summary judgment on damages, except that

the court held that plaintiffs as a matter of law were not

entitled to pursue certain damage theories, including among

other things, that they could not recover as a component of

expectancy damages the cost of replacing $1.06 billion of

deposits lost due to branch sales that occurred in mitigating the

loss of goodwill as regulatory capital and that plaintiffs could

not seek restitution as a remedy where they continued in

operation. Long Island Sav. Bank v. United States, 60 Fed. Cl.

80, 96-97 (2004).

JTla

(codified in scattered sections of Title 12 of the U.S.

Code, including 12 U.S.C. § 1464), and the adoption

of implementing regulations on November 8, 1989, to

be effective December 7, 1989, by the Office of Thrift

Supervision (“OTS”), the successor of the Bank Board

under FIRREA.* The court further finds that

plaintiffs are entitled to damages caused by the

breach in the amount of $435,755,000.

FACTS‘

Syosset

Syosset was a conservatively run, “plain vanilla”

bank with branches on Long Island, in Queens,

Nassau, and Suffolk counties. Tr. 3913:23 to 3914:1,

3917:10-16 (Test. of James J. Conway, Jr., Syosset’s

chairman of the board of directors and chief

executive officer); Tr. 66:11-14 (Test. of Mark Fuster,

at various times Syosset’s senior vice president,

treasurer, and chief financial officer); Tr. 981:2-8

(Test. of William E. Viklund, Syosset’s president and

chief operating officer). Syosset was organized as a

New York State chartered mutual savings bank in

1876 and had converted to a federal mutual savings

bank in December 1982. DX606 at WOQ 632 1702

(Prospectus by Long Island Savings Bank, FSB (Feb.

14, 1994)). Early in the 1980s, Syosset was a healthy

thrift that had twelve branches, roughly $950 million

3 FIRREA also abolished FSLIC and transferred its insurance

functions to the Federal Deposit Insurance Corporation

(“FDIC”). See Winstar, 518 U.S. at 856.

4 This recitation of facts constitutes the court’s principal

findings of fact in accord with Rule 52(a) of the Rules of the

Court of Federal Claims (“RCFC”). Other findings of fact and

rulings on questions of mixed fact and law are set out in the

analysis.

72a

to $1 billion in assets, and a tangible net worth of

approximately 8% of those assets, or $80 million. Tr.

981:9-22 (Test. of Viklund). Syosset’s management

realized that it would have to grow to remain

competitive and to address the marketing and

technological changes that were occurring in the

banking industry following considerable

deregulation. Tr. 982:7-16 (Test. of Viklund).

The FDIC’s Creation of Suffolk Phoenix

In 1979, two other sizeable thrifts on Long

Island, County Federal Savings and Loan

Corporation (“County”) and Suffolk County Federal

Savings and Loan Association (“Old Suffolk”), began

incurring significant operating losses. See PX 5 at 5-

10 (Memo from Edward J. O’Connell, III, Regional

Director, FHLBB, to J.J. Finn, Secretary to the

Board, FHLBB (May 13, 1983)). County was almost

as large as Syosset, and Old Suffolk was actually

larger than Syosset. Tr. 66:5 to 67:13 (Test. of

Fuster). County and Old Suffolk were merged in

April 1982 under FSLIC’s “Phoenix program,”5

resulting in the creation of Suffolk County Federal

5 FSLIC designed the Phoenix program

to consolidate several failing or failed thrifts into a single

association that would not only achieve efficiencies and

receive close regulatory oversight, but would also receive

significant assistance from the federal government. This

assistance included direct monetary’ contributions,

regulatory forbearances, and authorization to use a purchase

accounting system whereby assets and liabilities would be

revalued at market price and the ensuing net liability would

be recorded as an asset called ‘supervisory goodwill’ and

accorded an extended amortization term.

LaSalle Talman Bank, F.S.B. vy. United States, 317 F.3d 1363,

1367 (Fed. Cir. 2003).

73a

Savings and Loan Association (“Suffolk Phoenix”).

PX 5 at 1. In connection with this merger, Suffolk

Phoenix received $62 million from FSLIC in the form

of interest-bearing notes in exchange for income

capital certificates (“ICCs”) and net worth

certificates (“NWCs”). PX 78 at LIP0017898 (Suffolk

Phoenix’s Consolidated Financial Statements and

Schedules (Dec. 31, 1982)). Suffolk Phoenix recorded

on its books approximately $742 million of

supervisory goodwill to be amortized over forty years

on the straight-line method. Jd.

Syosset’s Acquisition of Suffolk Phoenix

In August 1982, Syosset, acting through its legal

counsel, offered to acquire Suffolk Phoenix from

FSLIC. See PX 67 (Letter from Douglas P. Faucette,

Muldoon & Murphy, to H. Brent Beesley, Director,

FSLIC (Aug. 31, 1982)). Syosset’s offer letter

proposed that it acquire Suffolk Phoenix through a

direct merger in exchange for a capital contribution

by FSLIC in the amount of $225 million. Jd. at 1. In

addition, Syosset conditioned its offer on the Bank

Board’s approval of Syosset’s use of “the purchase

method of accounting pursuant to the method

generally accepted in the savings and loan industry

on August 9, 1982 ... [,] includ[ing] the straight line

amortization of any goodwill created by such

adjustment [of Syosset’s assets] for a 40-year period.”

Id. at 2. By this language, Syosset sought to

grandfather generally accepted accounting principles

(“GAAP”) as they existed prior to the Financial

Accounting Standards Board’s promulgation of

Statement of Financial Accounting Standards No. 72

(““SFAS 72”) in February 1983. See DX 1238 (SFAS

72); Tr. 94:22 to 97:11 (Test. of Fuster). As the

Supreme Court explained in Winstar,

T4a

SFAS 72 eliminated any doubt that the

differential amortization periods on which

acquiring thrifts relied to produce paper

profits in supervisory mergers were

inconsistent with GAAP. SFAS 72 also

barred double counting of capital credits by

requiring that financial assistance from

regulatory authorities must be deducted from

the cost of the acquisition before the amount

of goodwill is determined.

Winstar Corp., 518 U.S. at 855 (citation omitted).

Syosset’s August 1982 proposal requested pre-SFAS

72 accounting treatment to set in place a

permissible, favorable accounting option that would

soon become cbsolete. Although SFAS 72 was

“applied prospectively to business combinations

initiated after September 30, 1982[,] ... [rletroactive

application to a business combination initiated prior

to October 1, 1982[wa]s permitted but not required.”

DX 1238 15.

Syosset’s offer letter further proposed that

“[njotwithstanding any change in generally accepted

accounting principles o[r the] interpretation thereof,

... FHLBB shall permit LISB to report for any and all

regulatory purposes as well as any reports published

to its customers, creditors, depositors, security

holders or the public, its financial condition and

operations in accordance with the results of the

[purchase method] adjustments described in the

preceding sentence.” PX 67 at 2. In that connection,

Syosset requested from FSLIC an indemnification for

any lost profits caused by a _ subsequent

governmental decision to disallow use of the

purchase method of accounting. I/d. at 2-3. FSLIC

did not respond to Syosset’s August 1982 offer. Tr.

75a

94:22 to 99:18 (Test. of Fuster); Tr. 996:18 to 1000:16

(Test. of Vicklund).

Subsequent to the merger between County and

Old Suffolk, the financial condition of the resulting

institution continued to decline. See PX 5 at 1-4

(Memo from O'Connell to Finn (May 13, 1983)).

Consequently, in October 1982, the regulators

undertook a national solicitation for potential

acquirers of the Suffolk Phoenix and conducted a

bidders’ conference in December of that year. Jd. at

11. Syosset attended that conference and submitted

a proposal in January 1983, PX 3 (Letter from John

R. Hall, Muldoon, Murphy, Bray & Faucette, to

Angelo A. Vigna, Supervisory Agent, FHLBB (Jan.

20, 1983)), which proposal Syosset supplemented and

amended in April of the same year. PX 4 (Letter from

Hall to Beesley (Apr. 5, 1983)). The offer submitted

in January contained two alternative bids, one

proposing assistance from FSLIC in the form of

capital certificates, and the other requesting a

combination of capital certificates, cash, and

subsidized borrowings. See PX 3. An amended

proposal by Syosset in April 1983 contained only the

latter bid; in these proposals, Syosset uniformly

requested accounting treatment containing elements

that had been put forward in its offer of August 1982,

but in somewhat modified form. See PX 4; Tr.

110:14-22 (Test. of Fuster).

Syosset’s overriding goal with respect to the

proposed transaction was to protect itself from

Suffolk Phoenix’s tangible-capital deficit. Tr. 68:25 to

69:6, Tr. 72:3-14 (Test. of Fuster); PX 57, item (2)

(list of items to consider for acquisition). Syosset’s

secondary goal was to secure its ability to use the

resulting goodwill to stay in business, but not to

76a

grow. See Tr. 657:15 to 660:15 (Test. of Fuster); Tr.

1153:4 to 1155:18 (Test. of Viklund); Tr. 3915:10-23

(Test. of Conway); DX 1545 at 1 (Letter from James

J. Nacos, the banks’ executive vice president and

secretary, to Stephen D. Rohrs, Assistant District

Director, OTS (Jan. 31, 1991)). To achieve these

goals, Syosset proposed that Suffolk Phoenix would

convert to the stock form, and Syosset would acquire

Suffolk Phoenix as a wholly-owned subsidiary, rather

than by merger, for a purchase price of $100,000 in

exchange for capital stock. PX 3 at 3-4; PX 4 at 2.6 In

addition, Syosset would maintain the subsidiary’s

net worth ratio at a minimum of one percent. PX 3 at

4; PX 4 at 2. Regarding the proposed accounting

treatment, Syosset would be permitted to record

goodwill “in accordance with the purchase method of

accounting pursuant to the method generally

accepted in the savings and loan industry on August

9, 1982,” and “[s]uch method [would] include the

straight line amortization of any goodwill created by

such adjustment for a 40-year period ....” PX 3 at 4;

PX 4 at 3. Syosset’s bid further provided that

“[njotwithstanding any change in generally accepted

accounting principles or interpretation thereof, ... the

{[Bank] Board shall permit Suffolk [Phoenix] and

LISB to report for any and all regulatory purposes”

6 The change in form of the transaction from a proposed merger

to a proposed purchase of all of the stock of a subsidiary

reflected in Syosset’s August 1982 and January 1983 proposals,

respectively, was due to the Bank Board’s establishment on

January 17, 1983 of a new method of accounting, known as

“push-down” accounting, for thrifts entering into purchase

transactions. Bank Board Memorandum R-55 permitted an

acquirer to record, or “push-down,” goodwill onto the books of

the acquired association. See PX 8 (Memorandum R-55 (Jan.

17, 1983)); Tr. 102:16 to 105:2 (Test. of Fuster).

77a

in accordance with pre-SFAS 72 accounting

treatment. PX 3 at 4; PX 4 at 3; Tr. 106:3 to 107:23

(Test. of Fuster).

Out of six bids received, FSLIC “determined that

the bid of LISB [wa]s the most favorable.” PX 5 at

11-12 (Memo from O’Connell to Finr (May 13, 1983));

see also PX 95 at 5-7 (‘A Memo” from David W.

Glenn, Director, FSLIC, to FHLBB (Aug. 9, 1983)).

Thereafter, representatives of Syosset and the Bank

Board engaged in detailed negotiations regarding the

nature of the assistance FSLIC would provide, the

accounting treatment that Syosset and its subsidiary

would apply, and the period of amortization of

goodwill that the transaction would generate. The

negotiations proceeded along the lines outlined in

Syosset’s April 1983 amended bid until Syosset’s

outside counsel working on the transaction, John R.

Hall, received on July 5, 1983 an undated letter from

the Bank Board that was inconsistent with the terms

Syosset had been seeking in two important respects.

Tr. 817:10 to 818:3 (Test. of Hall); see PX 6 (Letter

from Lawrence W. Hayes, Senior Associate General

Counsel, FHLBB, to Hall). In that letter, the Bank

Board agreed that FSLIC’s cash contribution and the

resulting goodwill would count toward computing

Suffolk Phoenix’s net worth, but the Bank Board

specified a thirty-five year amortization period in

lieu of the forty-year period Syosset proposed. PX 6

at 6; Tr. 117:3-13 (Test. of Fuster); Tr. 818:4-19

(Test. of Hall). The letter further stated the Bank

Board’s understanding that such accounting

treatment was allowed by regulatory accounting

principles (“RAP”) rather than GAAP. PX 6 at 6; Tr.

117:3 to 118:11 (Test. of Fuster). Syosset did not

consent to these terms.

78a

Instead, Mark Fuster, Syosset’s senior vice

president, treasurer, and chief financial officer, made

handwritten changes to a draft of the Assistance

Agreement that Syosset received from FSLIC to

reflect the terms that Syosset had originally

proposed. Tr. 124:25 to 133:12 (Test. of Fuster); PX

87 (draft Assistance Agreement (date illegible)); PX 7

at GTP0031225-26 (Fuster’s handwritten changes to

draft Assistance Agreement); PX 502 (demonstrative

of Fuster’s handwritten changes to draft Assistance

Agreement in typewritten form). In pertinent part,

Mr. Fuster proposed that changes be made to the

accounting section, Section 10, specifying that the

applicable accounting principles would include those

“in effect for mergers and acquisitions prior to the

issuance of FASB # 72, permitting the use of ‘push

down accounting’ as noted in R Memorandum # 55

and those accounting principles used by [Syosset]

prior to this agreement.” PX 7 at GTP0031225; PX

502. Mr. Fuster informed the regulators of these

requested changes at a meeting between

representatives of Syosset and the government held

in July 1983 at the Bank Board’s Washington, D.C.

offices. Tr. 133:13 to 134:16 (Test. of Fuster); 818:21

to 821:7 (Test. of Hall). The regulators accepted Mr.

Fuster’s terms and added his proposed language to a

draft dated July 13, 1983 and to the final Assistance

Agreement. Tr. 134:17-19, 135:6 to 136:2 (Test. of

Fuster); PX 90 at 19 (draft Assistance Agreement

(July 13, 1983)); PX 1 at 19-20 (executed Assistance

Agreement (Aug. 17, 1983)).

In connection with the transaction, Suffolk

Phoenix converted to a federal stock savings bank

and changed its name to The Long Island Savings

Bank of Centereach FSB. PX 1 at 1. Syosset acquired

Centereach as a wholly owned subsidiary by paying

79a

$100,000 cash for all of Centereach’s stock. Id.

Pursuant to the assistance agreement entered by the

parties, FSLIC paid $75 million to Centereach as a

direct contribution to the bank’s net worth, id. § 3(a),

and FSLIC paid Syosset $63 million in the form of a

five-year promissory note in exchange for an ICC in

the same amount issued by Syosset. Id. § 5(b). In

return, Syosset assumed responsibility for the $62

million of outstanding ICCs and NWCs that Suffolk

Phoenix had issued. Id. § 9(c)(3)-(4). Syosset was

further obligated to maintain Centereach’s net worth

at one percent of Centereach’s liabilities for ten years

following the date of acquisition, after which period

Syosset would maintain the subsidiary’s net worth at

the level required by regulation for institutions

insured for twenty years or more. Id. § 9(a).

Syosset applied the push-down method to

account for the acquisition, and Centereach recorded

approximately $625.4 million of goodwill on its

books, records, and audited financial statements,

which amount was to be amortized over forty years

by the straight-line method. Tr. 155:9 to 156:19

(Test. of Fuster); PX 105 at LIP0828908, LIP0828910

(Centereach’s Explanation of Purchase Accounting

Transactions (Aug. 17, 1983)); PX 109 at

GTP0097041-42 (the banks’ Consolidated Financial

Statements (1983 & 1982)). Absent the ability to

include this massive amount of goodwill in the

computation of Centereach’s regulatory capital,

Centereach would have had a negative net worth of

approximately $550 million and, on a consolidated

basis, would have overwhelmed Syosset’s retained

earnings. Tr. 156:23 to 157:1 (Test. of Fuster). As

required by the Bank Board’s resolution approving

the transaction, Syosset submitted a letter from its

independent accounting firm, Peat, Marwick,

80a

Mitchell & Co., opining that the acquisition had been

accounted for in accordance with GAAP. PX 9 (Letter

from Nacos to Vigna attaching accountant’s letter

(Nov. 17, 1983)). The supervisory agent at the Bank

Board received that opinion letter and found it to be

acceptable. Tr. 2147:20 to 2148:5 (Test. of Vigna).

Syosset’s and Centereach’s Successful Operations

On a consolidated basis, Syosset’s acquisition of

Centereach enabled Syosset to increase its branch

network fourfold, from twelve to forty-eight

branches, and to grow its assets more than threefold,

from approximately $1.2 billion to $4.1 billion. PX

104 at LIP0000045-46 (Nacos’s copy of closing binder

entitled “Acquisition of Suffolk County Federal

Savings and Loan Association” (Aug. 17, 1983)); PX

109 at GTP0097037 (the banks’ Consolidated

Financial Statements (1983 & 1982)). After Syosset’s

acquisition of Centereach, the two banks operated

with separate accounts but were effectively run in

tandem, with almost identical board members and

officers, and with a single loan department. Tr.

1155:25 to 1158:6 (Test. of Viklund). The two banks’

operations were virtually indistinguishable, with

only the fine print on signage and filigree

denominating either Syosset or Centereach. See id.

Operating pursuant to a very conservative

philosophy, the banks lended locally to buyers of

single-family homes and one- to four-unit properties.

Tr. 657:15 to 658:10 (Test. of Fuster); Tr. 3913:19 to

3914:21, 3915:10 to 3917:16 (Test. of Conway). The

banks developed a practice of selling fixed-rate loans

into the secondary market while keeping floaters, or

adjustable-rate loans. Tr. 1361:21 to 1365:18 (Test. of

Singer); Tr. 5609:4-17 (Test. of Fuster). Their

purpose was to keep themselves “asset-sensitive,

8la

which means your assets reprice faster than your

liabilities.” Tr. 1365:8-9 (Test. of Singer). The banks,

through Centereach, had also kept a folio of deeply

discounted loans acquired with the Suffolk Phoenix

transaction. Those loans had a substantial mark-to-

market gain that was being accreted over the life of

the assets. Tr. 1365:21 to 1366:14 (Test. of Singer).

The banks also developed some new lines of

business, especially home-equity loans at floating

rates, that proved to be excellent assets for the bank.

Tr. 1364:15 to 1365:11 (Test. of Singer). They also

issued a few student loans. Tr. 5607:8-11 (Test. of

Fuster).

As the years passed, the consolidated statements

of the banks’ financial condition show that the

tangible-capital deficit in Centereach was gradually

being reduced by retained earnings. See PX 109; PX

125 (the banks’ Consolidated Financial Statements

(1984 & 1983)); PX 130 (the banks’ Consolidated

Financial Statements (1985 & 1984)); PX 141 (the

banks’ Consolidated Financial Statements (1986 &

1985)); PX 145 (the banks’ Consolidated Financial

Staiements (1987 & 1986)); PX 152 (the banks’

Consolidated Financial Statements (1988 & 1987));

PX 180 (the banks’ Consolidated Financial

Statements (1989 & 1988)). Between 1983 and 1989,

Syosset and Centereach on a consolidated basis

increased their total assets from $4.1 billion to $5.3

billion and total deposits from $3.2 billion to $4.4

billion. Compare PX 109 at GTP0097037, with PX

180 at LIP0017412. The banks further expanded

their operations in April 1986 with the FSLIC-

assisted acquisition of Flushing Federal Savings and

Loan Association, which had approximately $422

million in assets and eight branches located in

Queens, Nassau, and Suffolk counties. PX 145 at

82a

LIP0148358-59 (the banks’ Consolidated Financial

Statements (1987 & 1986)); Tr. 214:12-22 (Test. of

Fuster); Tr. 1006:14 to 1007:3 (Test. of Viklund).

During the same period, the banks unsuccessfully

sought other acquisitions, and they closed or sold

several branches located outside the Long Island tri-

county area. Tr. 215:24 to 216:25 (Test. of Fuster);

Tr. 1009:19 to 1011:3, 1014:17 to 1015:12 (Test. of

Viklund); PX 131 (Minutes of Syosset’s board

meeting (Nov. 11, 1985)); PX 154 (Syosset’s proposal

to acquire four branches of Goldome (Oct. 24, 1988)).

The Advent of FIRREA

The enactment of FIRREA on August 9, 1989

eliminated or phased out the ability of thrifts to

count goodwill toward regulatory capital”? On

November 8, 1989, OTS promulgated interim

regulations implementing the new capital

requirements to take effect on December 7, 1989. 54

Fed. Reg. 46,845 (Nov. 8, 1989). In addition, on

November 6, 1989, OTS issued Thrift Bulletin 36,

which stated that a thrift that failed any one of the

minimum capital requirements would be subject to

“more than normal supervision” and to certain

growth restrictions. DX 292 at LIP134538 (Letter

from Vigna to Centereach’s board of directors and

7 FIRREA mandated new capital standards as_ follows:

“tangible” capital was to be maintained at a level “not less than

1.5 percent of the savings association's total assets,” “core”

capital was required to be “not less than 3 percent” of total

assets, and “risk-based” capital was required to be kept at a

level not “materially” lower than that required for national

banks. 12 U.S.C. § 1464(t)(2). Supervisory goodwill and other

unidentifiable intangible assets could not be counted towards

tangible capital and were to be phased out of calculations for

“core” capital by 1995. 12 U.S.C. § 1464(t)(3)(A), (t)(9)(A)-(C).

83a

managing officer attaching copies of Thrift Bulletins

36 and 36-1 (Dec. 18, 1989)). A thrift that failed one

or more of the capital requirements was required,

among other things, to submit to OTS a “capital

plan” demonstrating that it would achieve capital

compliance no later than December 31, 1994. Id. at

LIP 134539.8

Subsequent to passage of FIRREA, Centereach

had on its books approximately $492 million of

supervisory goodwill, of which amount

approximately $458 million owas _ rendered

immediately non-qualifying by the capital standards

imposed by FIRREA. Tr. 224:16-20, 244:19 to 245:23

(Test. of Fuster); PX 26 Revised (Demonstrative

summarizing Centereach’s core capital position from

1989 through 1993 including goodwill). With

FIRREA, Centereach’s capital ratio plummeted from

more than 8% positive to a negative 11%. Tr. 224:11-

15 (Test. of Fuster); PX 21 (Summary of Centereach’s

quarterly regulatory capital ratios (1985-89)). By

contrast, Syosset exceeded the new capital

requirements. PX 205 at 1 (Internal OTS mem. from

John Robinson through Jonathan Fiechter and John

Downey (April 30, 1990)). Combined, the banks

would have had negative $29 million of tangible

capital. Id. at 2. As a consequence of Centereach’s

capital position, it retained the investment banking

firm of Goldman Sachs & Co., DX 301 at 21 (Capital

Plan for Centereach (Jan. 8, 1990)); Tr. 290:23 to

291:7 (Test. of Fuster), and submitted a capital plan

8 A non-compliant thrift was also given the option of applying

for either a temporary “capital exception” (available only in

“extraordinary situations”), or a “capital exemption” from

specific provisions (which exemption had to “be accompanied by

an acceptable capital plan”). DX 292 at LIP134538-39.

84a

to OTS on January 8, 1990 in accord with Thrift

Bulletin 36. DX 301. Because the plan did not

demonstrate that Centereach would achieve capital

compliance by December 31, 1994, OTS informed

Centereach that the plan was unacceptable and

would be rejected, and Centereach withdrew it. Id. at

14; PX 197 (Internal OTS mem. from Joseph P.

Kehoe, Assistant Director, OTS, to Vigna (Feb. 20,

1990)); DX 838 at 7-8 (Minutes of Syosset’s board of

trustees meeting (Sept. 25, 1990)); Tr. 292:7-18 (Test.

of Fuster).

Centereach’s Capital Plan

Over the next several months, OTS engaged in

internal discussions about whether to require

Syosset and Centereach to file a capital plan on a

consolidated basis, and OTS eventually decided to

require consolidation. PX 197; PX 199 at

GTP0033235-38 (Minutes of meeting of Supervisory

Policy Committee (Mar. 21, 1990)); PX 203 (Internal

OTS mem. of oral communication between Kehoe

and James Caton (Apr. 19, 1990)); PX 205 (internal

OTS mem. from John Robinson through Jonathan

Fiechter and John Downey (Apr. 30, 1990)). At

meetings between the parties held in April and May

1990, the banks urged OTS not to require the banks

to consolidate, which would result in two capital-

deficient institutions rather than just one, but Long

Island did indicate its willingness to supplement

Centereach’s capital plan and to. strengthen

Centereach’s capital position. DX 317 (Internal OTS

mem. from Ruth Ann Popielarski to the files (May 1,

1990)); PX 208 (Letter from Viklund to Vigna

supplementing meeting held on April 27, 1990 (May

1, 1990)); PX 11 (Internal OTS mem. from Kehoe to

the files (May 8, 1990)). Following those meetings,

85a

OTS ultimately relented on its position regarding

consolidation. PX 12 (Memorandum from Jonathan

L. Fiechter, Principal Senior Deputy Director, OTS,

to Vigna (Aug. 8, 1990)); PX 212 (Letter from Vigna

to Viklund (Aug. 24, 1990)); DX 83 at 7-8 (Minutes of

Syosset’s board of trustees meeting (Sept. 25, 1990)).

On October 25, 1990, Centereach submitted a second

capital plan, pursuant to which Syosset would make

additional capital contributions to Centereach

through 1994, PX 13 at 32-34 (Capital Plan for

Centereach (Oct. 25, 1990)), and Centereach would

“determine later the precise further actions to be

taken in 1994 (or thereafter), depending on the

economic, regulatory, legal and other circumstances

at the time.” Jd. at 42.

Centereach submitted to OTS further

amendments to its capital plan in December 1990

and April 1991, PX 225 (Letter from Conway to

David R. Dorgan, Senior Assistant Director, OTS

(Dec. 18, 1990)); DX 1565 (Letter from Nacos to

Michael Simone, Assistant District Director, OTS

(Apr. 25, 1991)), and it received conditional approval

in May 1991. DX 1571 (Letter from Vigna to

Centereach’s board of directors (May 22, 1991)). In

October 1991, Centereach submitted another

amendment containing amended projections, DX

389A (Letter from Conway to Rohrs (Oct. 30, 1991)),

and OTS granted final conditional approval several

days later. DX 387 (Letter from Angelo A. Vigna,

then-Northeast Regional Director, OTS, to

Centereach’s board of directors (Oct. 30, 1991)). As

Thrift Bulletin 36 provided, the effect of such

approval was to allow Centereach to continue to

operate so long as it stayed in compliance with the

capital plan, i.e., continued moving toward capital

compliance. See DX 292 at LIP134538 (Letter from

86a

Angelo A. Vigna, then-District Director, OTS-New

York, to LISB’s board of directors and managing

officer attaching copies of Thrift Bulletins 36 and 36-

1 (Dec. 18, 1989)).

In April 1991, Centereach’s MACRO rating was

decreased from a composite rating of 2 to a composite

rating of 4 “result{ing] from the institution's

insolvent regulatory capital position.” PX 249 (Letter

from Vigna to Nacos (Mar. 25, 1992)); see also Tr.

286:1-20, 287:15 to 288:6 (Test. of Fuster); PX 35

(Demonstrative summarizing ratings for Syosset,

Centereach, and Long Island Bancorp, Inc.); PX 35A

(supporting materials for PX 35).9 “Because of the

assigned MACRO rating, Centereach ([wals

considered a troubled institution and [had to] pay the

premium assessment as indicated in Thrift Bulletin

48.” PX 249. Centereach’s capital deficiency also

caused Fannie Mae and Freddie Mac to notify

Centereach that it could no longer be a seller-

servicer. Tr. 286:21 to 287:8 (Test. of Fuster).

9 The financial regulatory entities use a rating system, initially

known by the “MACRO” acronym, and after FIRREA as

“CAMEL,” to evaluate the viability and strength of banks. See

Globe Sav. Bank, F.S.B. v. United States, 65 Fed. Cl. 330, 339 n.

6 (2005). The MACRO assessment evaluated the effectiveness

of management and the board of directors, along with asset

quality, capital adequacy, asset/liability and risk management,

and earnings (operations). The CAMEL assessment addresses

the same topics but refers to them as capital, assets,

management, earnings, and liability. A rating of “1” is the

highest rating, and a rating of “5” is the lowest. A composite “4”

rating indicates that the institution “ger erally exhibit[s] unsafe

and unsound practices or conditions” and has “serious financial

or managerial deficiencies that result in unsatisfactory

performance.” 61 Fed. Reg. 67021, 67026 (Dec. 19, 1996).

87a

On December 19, 1991, Congress enacted the

Federal Deposit Insurance Corporation Improvement

Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236

(1991) (codified at 12 U.S.C. §§ 1811-34b)

(““FDICIA”). Section 131 of FDICIA added Section 38

to the Federal Deposit Insurance Act, entitled

“Prompt Corrective Action,” establishing five new

capita] categories for insured depository institutions:

“well capitalized,” “adequately capitalized,”

“undercapitalized,” “significantly undercapitalized,”

and “critically undercapitalized.” Id. § 131A, 105

Stat. at 2253 (codified at 12 U.S.C. § 183lo ). On

September 29, 1992, final rules implementing that

section were adopted by the Board of Governors of

the Federal Reserve System, the Office of the

Comptroller of the Currency, FDIC, and OTS. 57

Fed.Reg. 44866-901 (Sept. 29, 1992) (codified in part

at 12 C.F.R. §§ 208.33 (Federal Reserve Board),

325.103 (FDIC) and 565.4(OTS) (1993)). The final

rules became effective December 19, 1992, which was

also the effective date of Section 131 of FDICIA. The

regulations defined the five capital categories in

terms of minimum capital ratios. See, e.g.,12 C.F.R. §

565.4(b) (1993).!° In addition, the regulations set out

10 Under these regulations, a bank was “[w]ell capitalized” if the

bank: “(i)(hJa{d] a total risk-based capital ratio of 10.0 percent

or greater; and (ii)[h]a[d] a Tier 1 risk-based capital ratio of 6.0

percent or greater; and (iii)[h]a[d] a leverage ratio of 5.0 percent

or greater.” 12 C.F.R. § 565.4(b)(1) (1993). The corresponding

ratios for an “[a]dequately capitalized” bank were 8.0, 4.0, and

4.0, except that a leverage ratio of 3.0 or greater sufficed “if the

bank [wa]s rated composite 1 under the MACRO rating system”

and “[djoes not meet the definition of a well capitalized savings

association.” Id. § 565.4(b)(2).

An “{u]ndercapitalized” bank had corresponding ratios less than

8.0, 4.0, and 4.0, except that such a bank could also have a

leverage ratio of less than 3.0 if it maintained a composite

88a

sanctions applicable to institutions deemed to be

undercapitalized, significantly undercapitalized, or

critically undercapitalized. Id. § 565.6."!

On November 16, 1992, OTS sent a letter to

Centereach stating that Centereach would have been

deemed critically undercapitalized based on its June

30, 1992 Thrift Financial Report data, had the

prompt corrective action provision of FDICIA been

effective at that time. PX 281 (Letter from Vigna to

Centereach’s board of directors (Nov. 16, 1992)).

Three days after that provision took effect, OTS sent

Centereach notice that Centereach’s capital ratios

placed it in the critically undercapitalized category.

PX 293 (Letter from Vigna to Centereach’s board of

directors (Dec. 22, 1992)).

The Restructuring

In April 1992, several months after FDICIA was

enacted, Mr. Viklund asked Mr. Fuster and Wilham

D. Singer, the banks’ chief investment officer, to

develop a restructuring plan for bringing Centereach

rating of 1 under the MACRO System and was not significantly

growing. Jd. § 565.4(b)(3). A “{sjignificantly undercapitalized”

bank had ratios less than 6.0, 3.0, and 3.0. Id. § 565(b)(4). A

“[c]ritically undercapitalized” bank had a “ratio of tangible

equity to total assets that [wa]s equal to or less than 2.0

percent.” Id. § 565(b)(5).

11 Such a bank became subject to the provisions of 12 U.S.C. §

1831o0(d), (e){1), (e)(2), (e)(3), and (e)(4), restricting payment of

capital distributions and management fees, requiring that the

banking agency monitor the condition of the bank, requiring

submission of a capital restoration plan, restricting the growth

of the bank’s assets, and requiring prior approval of certain

expansion proposals. 12 C.F.R. § 566.6(a)(2) (1993). In addition,

the compensation paid to senior executive officers could be

restricted. See id. § 565.6(a)(3).

89a

at least into the well-capitalized capital category

under FDICIA. Tr. 339:18 to 340:18 (Test. of Fuster);

Tr. 1076:1 to 1077:5 (Test. of Viklund); Tr. 1344:19 to

1345:13 (Test. of Singer). Messrs. Fuster and Singer

concluded that in addition to reducing borrowings,

realizing embedded profits in assets, and writing off

its remaining goodwill, Centereach would have to

shrink and sell deposits. Tr. 340:19 to 341:15 (Test.

of Fuster); Tr. 1345:17 to 1346:25 (Test. of Singer).

Initially, the banks’ management’ envisioned

shrinking only Centereach, but at Mr. Nacos’s

suggestion it also considered shrinking both

Centereach and Syosset. Tr. 341:16 to 342:1 (Test. of

Fuster); see also Tr. 1345:19 to 1346:15 (Test. of

Singer). This strategy was considered because,

although Centereach was progressing ahead of the

projections of its capital plan, the banks’

management realized that Centereach could not

achieve capital compliance on its own. Tr. 342:2 to

344:3 (Test. of Fuster); PX 518 (Demonstrative

showing capital still needed by Centereach after

mitigation efforts to June 30, 1992). Mr. Fuster and

his staff additionally considered and _ rejected

merging the two banks without shrinkage,

concluding that it was not reasonable to sacrifice

Syosset’s favorable capital position in a circumstance

in which the resulting entity would still be subject to

a capital plan. Tr. 344:25 to 345:8 (Test. of Fuster).!2

12 Messrs. Fuster, Singer, and other members of the banks’

management briefly considered a possible sale of Centereach to,

or merger of Centereach with, a healthy banking institution but

rapidly abandoned that option because of Centereach’s

significant tangible-capital deficit. Tr. 344:12-24 (Test. of

Fuster). They did not consider conversion to a stock company.

Tr. 345:9 to 346:12 (Test. of Fuster). Mr. Fuster testified that

“(t]he only motivation we had in developing [the restructuring]

90a

In August 1992, a restructuring committee of the

banks was formed and selected the investment

banking firm of Bear, Stearns & Co. (“Bear Stearns”)

to prepare a restructuring analysis. PX 260 at 1

(Minutes of restructuring committee meeting (Aug.

24, 1992)); see also PX 263 at 4 (Syosset’s board of

trustees meeting (Sept. 22, 1992)); PX 269 (Letter

from Robert A. Baer, Jr., Senior Managing Director,

Bear Stearns, to Viklund confirming the banks’

engagement of Bear Stearns (Oct. 21, 1992)); Tr.

346:17 to 347:2 (Test. of Fuster). Bear Stearns

performed its due diligence during September and

October of 1992, Tr. 350:2-4 (Test. of Fuster); PX 261

(Preliminary due diligence request list from Bear

Stearns to Syosset (Aug. 25, 1992)), and presented its

final restructuring analysis and recommendation to

the banks’ boards the following month. PX 14

(Presentation on Restructuring Alternatives (Nov.

19, 1992)); PX 283 at LIP0119461-68 (Minutes of

Centereach’s board of directors meeting (Nov. 19,

1992)). The plan recommended by Bear Stearns

involved achieving a targeted 5.25% capital ratio by

selling branches with $1.0 billion of deposits, funded

by the sale of $1.25 billion of securities and loans,

paying down other borrowings of $250 million,

merging Centereach and Syosset, and writing off

goodwill. PX 14 at GTP0057159, GTP0057162-63; PX

283 at LIP0119463-64. Bear Stearns considered and

plan was to get rid of the capital plan.” Tr. 346:15-16 (Test. of

Fuster). The banks explicitly rejected the proposal of one

investment advisor, Sandler O'Neill, which at that time (August

1992) focused more on making a proposal to buy the bank

themselves or take it public through a conversion. Tr. 1355:2-23

(Test. of Singer) (“We had no desire to go public. Our desire was

to solve our capital problem and grow the company and manage

it, as we had managed it for a number of years.”).

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rejected several restructuring alternatives, including

a targeted capital ratio of 5%, because that option

would not provide for any capital cushion

whatsoever. PX 14 at GTP0057159. In addition, Bear

Stearns analyzed and rejected targeting a 6% capital

ratio, which alternative would result in a severe

impact on future earnings and a high expense ratio.

Id.

Following Bear Stearns’s presentation, the

banks’ boards decided to implement Bear Stearns’s

recommended plan. PX 283 at LIPO119469; Tr.

935:5-18 (Test. of Donald Wenk, chairman of

Syosset’s board of directors, succeeding Conway); Tr.

1437:13-25 (Test. of John J. Conefry, chairman of

Syosset’s board of directors and chief executive

officer at relevant times). The banks submitted their

restructuring plan to OTS on November 23, 1992, DX

1657 (Letter from Viklund to Vigna (Nov. 23, 1992)),

and the following month OTS provided written notice

that it did not object to that plan and considered the

proposed restructuring an acceleration of the

resolution of Centereach’s capital deficiency

addressed in Centereach’s capital plan. PX 297

(Letter from Vigna to Centereach’s board of directors

(Dec. 23, 1992)).

In furtherance of their restructuring plan,

Centereach and Syosset began paying down

borrowings, selling assets, and taking preparatory

steps to sell branches. Based on the earlier work of

Messrs. Fuster and Singer, as examined and verified

by Bear Stearns, the banks knew they would have to

sell a significant volume of their better earning

assets to fund the sale of the branches. On behalf of

the banks, Mr. Singer began selecting and

assembling sizable packages of loans and mortgage-

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_ backed securities for sale and making sales. Tr.

1363:19 to 1364:14 (Test. of Singer). As to the

branches, the banks initially considered selling

branches clustered in particular locations, but

ultimately developed a list of twenty branches that

could be sold, with the buyer to pick ten branches

from this list. Tr. 735:17 to 736:21 (Test. of Fuster).

In due course, in April 1993 Syosset and

Ceniereach entered into an agreement in principle

with Home Savings of America (“Home Savings”) to

sell to the latter thrift ten branches in the tri-county

area which then had approximately $950 million of

deposits. PX 309 (Joint press release of Home

Savings and the banks (Apr. 29, 1993)). The three

banks entered into a Purchase of Assets and

Liability Assumption Agreement in June 1993,

pursuant to which Home Savings would purchase

five branches of Syosset and five branches of

Centereach. PX 311 at GTP0069185 (Purchase of

Assets and Liability Assumption Agreement (June 9,

1993)). The parties to the transaction submitted a

joint application to OTS in July 1993, and OTS

conditionally approved the application the following

month. PX 327 (Letter from Thomas F. Sharkey,

Assistant Regional Director, West Region, OTS, to

William J. Wiley, Vice President, Home Savings, and

Nacos (Aug. 4, 1993)). Closing the deal on September

3, 1993, Syosset and Centereach paid Home Savings

$817,195,112 to assume $836,253,302 of deposits. PX

333 at GPT0069110 (Summary of branch sale

accounting (Sept. 3, 1993)); DX 606 at 5, 33 (Long

Island Bancorp, Inc.’s Prospectus (Feb. 14, 1994)).!8

13 Non-compete covenants in the branch sale agreement with

Home Savings iimited future growth tnrough deposit

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Concurrently with this transaction, Syosset

merged into Centereach, a “reverse” merger of the

parent into the subsidiary, and the resulting entity

took the name The Long Island Savings Bank, FSB

(“Long Island” or “Bank”). PX 324 (Letter from Vigna

to Viklund granting conditional approval of

Centereach’s application to convert to mutual

charter and acquire by merger Syosset (July 30,

1993)); PX 325 (Letter from Vigna to Viklund

granting conditional approval of Centereach’s

application to transfer Syosset’s Assistance

Agreement to Centereach (July 30, 1993)); PX 335

(Memorandum from Viklund to Long _ Islanc’s

employees (Sept. 7, 1993)); DX 606 at 5, 33.4 In

connection with the merger, Long Island adopted

SFAS 72 and wrote off its remaining goodwill

balance, resulting in a charge of approximately $442

million to earnings in the Bank’s fiscal year that

ended September 30, 1993. Tr. 365:8-25 (Test. of

Fuster); PX 519 (Demonstrative showing Long

Island’s goodwill write-off); LX 606 at 5, 33, F-8.

Because the merger succeeded in making the

surviving entity well capitalized for purposes of

FDICIA, albeit barely, on September 3, 1993, OTS

terminated Centereach’s capital plan. PX 332 (Letter

from Vigna to Long Island’s board of directors (Sept.

3, 1993)).

To fund the branch-sale payment made to Home

Savings, Bear Stearns had initially projected that

acquisitions in certain counties until 1996. Tr. 598:16-23 (Test.

of Fuster).

14 The complaint in this action was filed on August 3, 1992,

more than a year prior to the merger on September 3, 1993.

Because of this sequential timing, Long Island’s predecessors,

Syosset and Centereach, are the plaintiffs named in the suit.

F#a

Syosset arid Centereach would need approximately

$1.1 billion. DX 926 at PLI169 1556 (Bear Stearns’s

presentation to the Special Committee of Long Island

(Sept. 29, 1992)). Following the announcement in

April 1993 of the sale of the ten branches, however,

those branches experienced deposit runoff in the

amount of approximately $114 million, reducing

their total deposits to approximately $836 million.

Tr. 5498:10 to 5499:11 (Test. of Dr. Nevins Baxter,

an expert witness for plaintiffs); PX 803

(Demonstrative showing deposit runoff in the sold

branches); PX 333 at GPT0069110 (Summary of

branch sale accounting (Sept. 3, 1993)). Because of

that runoff, Mr. Singer wld more assets than the

amount that ultimately became necessary. Tr.

5606:9-22 (Test. of Fuster).

The banks sold a variety of assets. They sold

their portfolio of student loans to Sallie Mae. They

securitized and sold approximately $300 million of

home equity lines of credit «“HELOCs”) (on which the

banks retained servicing). They also securitized and

sold a package of fixed-rate whole loans, (in which

the banks retained some servicing rights), and sold a

portfolio of mortgage-backed securities, together

totaling approximately $272 million. See Tr. 359:4-

15, 5601:1-11, 5602:10 to &603:6, 5607:3 to 5608:20

(Test. of Fuster); Tr. 1364:2-14, 1365:21 to 1366:4,

1370:10 to 1377:2 (Test. of Singer); PX 296 (Letter

from Singer to Simone (Dec. 23, 1992)); DX 926

PLI169 1556; PX 14 at GTP0057163 (Presentation on

restructuring alternatives (Nov. 19, 1992)). The

banks would not have sold the HELOCs but for the

restructuring, because those loans produced a

favorable net interest margin with a relatively short

duration. Tr. 360:2-14 (Test. of Fuster); Tr. 1364:15

to 1365:11 (Test. of Sieger). Likewise, the agency

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mortgage-backed securities and whole loans would

not have been sold in the ordinary course because

Long Island “could not replace them in the market at

the current yield that they were throwing off.” Tr. —

1366:5-14 (Test. of Siriger). Some of those loans and

securities had been marked to market at a discount

in connection vith the Suffolk Phoenix transaction,

and Centereach had been amortizing gains on those

marked-to-market loans and securities, but market-

related gains were realized upon their sale.

Specifically, the sale of these assets produced an

accretion gain of approximately $41 million and a $3

million gain on a cash basis. PX 296; Tr. 1365:23 to

1366:4 (Test. of Singer); Tr. 5609:23 to 5611:4 (Test.

of Fuster). The banks invested the proceeds of the

sales in short-term securities in anticipation of the

need to fund the branch sale, and it retained the

securities to the extent it did not need the funds for

the branch sale. Among other things, it expanded its

portfolio of U.S. Treasury securities. PX 391 at 44

(Long Island Bancorp, Inc.’s annual report (1994)).

Immediately prior to the branch sale and merger,

on August 31, 1993, the capital ratio of the banks on

a consolidated basis was 4.26%, an improved but still

insufficient ratio that reflected the sale of assets and

reduction in borrowings to prepare for the branch

sale. Tr. 368:6 to 369:5 (Test. of Fuster); PX 520

(Demonstrative showing tangible-capital ratios of

banks before and after restructuring). Subsequent to

the branch sale and merger, on September 30, 1993,

the Bank’s capital ratio was 5.31%, i.e., only 0.31%

above the minimum ratio for the well capitalized

level. Tr. 369:6-12 (Test. of Fuster); PX 520.

OTS and FDIC conducted examinations of the

banks commencing prior to their restructuring and

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concluding subsequent to the restructuring and their

merger. PX 15 (FDIC's report of examination

(commenced July 6, 199%)); PX 328 (OTS report of

examination (commenced Aug. 11, = 1993)).

Representatives of both regulatory entities met with

Long Island’s board of trustees on October 26, 1993

to present the findings of their respective

examinations. PX 15 at GTP0056285; PX 328 at 3;

PX 16 at 7-10 (Long Island’s board of trustees

meeting (Oct. 26, 1993)). OTS indicated in its report

that “(t]he principal area of concern is asset quality

as the level of delinquencies in the various loan

portfolios remains high,” PX 328 at 1, and that asset

quality is “considered less than satisfactory.” Id. at 5.

Despite this finding with respect to the MACRO

factor of asset quality, OTS informed Long Island

that OTS assigned the Bank a composite MACRO

rating of “2.” PX 328 at 2; PX 15 at GTP0056285; PX

16 at 8; Tr. 369:23 to 370:3 (Test. of Fuster); PX 35

(Demonstrative summarizing ratings for Syosset,

Centereach, and Long Island Bancorp, Inc.); PX 35A

(supporting materials for PX 35) at PX035A-0026

(Letter from Rohrs to Long Island’s board of directors

(Oct. 28, 1993)).

For its part, FDIC agreed with OTS that Long

Island’s level of nonperforming assets posed a

probiem; however, FDIC considered the problem so

serious as to disqualify the Bank from a composite

“2” rating. FDIC observed at the meeting that the

restructuring and merger “had brought capital up to

5%, but in the process, the Bank had to sell some

high earning and good assets.” PX 16 at 9; see also

PX 15 at GTP0056283 (stating FDIC’s opinion that

“fallthough capital is mow above’ regulatory

requirements, the volume of marginal and inferior

quality assets remains at a high level and will

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continue to have a negative impact on earnings

performance in the future”); id. at GTP0056285

(FDIC's representatives informing Long Isl

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