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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendices
- **Published:** January 1, 2008

## Text

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.

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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

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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

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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.

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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

40a

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.

4la

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

42a

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

43a

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

44a

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.”

45a

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

46a

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.

47a

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

49a

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

50a

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

dla

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

54a

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

55a

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

57a

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

6la

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

63a

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

64a

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_1306%3A2. Public record. Not legal advice.