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.”),
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,
Accordingly, the previous opinion of the court in this appeal, issued on February 1, 2007, and reported at
I.
This case is another of the many
Wins-
tar-cases arising from the savings and loan crisis of the 1980s.
See generally United States v. Winstar Corp.,
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,
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 Center-each’s authorized common stock for $100,000. Assistance Agreement at 1. The agreement required the government to make a direct cash contribution of $75
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 I.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 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(b) 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
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 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.”
LISB Summ. J.,
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 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 distri
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 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.
* * *
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 film 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 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. The affidavit also stated that “FSLIC and FHLBB would not provide financial or regulatory assistance to acquirers engaged in the type of serious
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,
“With FIRREA, Centereach’s capital ratio plummeted from more than 8% positive to a negative 11%.”
LISB Trial,
Several institutions sued the government “[b]elieving 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.
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, 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,
In June 1992, Conway resigned from LISB and Centereach. In August 1992,
In February 1993, 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.
In February 1998, Conway pled guilty to a criminal misdemeanor information charging him with violating 18 U.S.C. § 215. 1 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 the law firm as its legal counsel 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.”
This conviction led the New York Supreme Court, Appellate Division, to disbar Conway for professional misconduct in August 2000.
In re Conway,
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 Claims. The government’s answer included affirmative defenses and
E. Proceedings Before the Court of Federal Claims
On December 9, 2002, the Court of Federal Claims decided in favor of LISB and Centereaeh on the parties’ cross-motions for summary judgment on the government’s affirmative defenses and counterclaims.
LISB Summ. J.,
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,
The government appeals the granting of summary judgment regarding its affirmative defenses in favor of LISB and Center-each in LISB Summ. J. and the determination of damages in LISB Trial. The Court of Federal 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.
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.
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 unenforceable. Answer ¶¶ 175-81; U.S. Summ. J. Mot. 31-47 (Apr. 17, 2001);
LISB Summ. J.,
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,
The Supreme Court has stated that “[w]hen the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.”
Winstar,
The Restatement of Contracts reflects many of the contract principles of federal common law.
Cf. Mobil Oil Exploration & Producing Se., Inc. v. United States,
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,
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.,
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.
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 regula
In this case, the Court of Federal Claims found that “Conway and his firm’s impropriety under banking laws is evident.”
LISB Summ. J.,
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.,
Therefore, 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.
2. Knowledge
The Court of Federal Claims found that “[a]lthough 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.,
a. Knoivledge 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.
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’s 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: “[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 counsel 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 solicited], 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 Centereaeh 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.,
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,
Therefore, the record demonstrates that Conway had knowledge of the certification’s falsity.
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, “[ejxcept 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,
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,
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 [wa]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.,
It is true that Conway pursued his own interests in his illegal compensation
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,
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 sound management of LISB, and it relied on Conway’s statements. The Government thus justifiably relied on Conway’s misrepresentation.”
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.
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:
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. v. United 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,
In this case, the government asserts, and we agree, that LISB’s false certifica
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,
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 breach. In
Westfed,
another Wmsiar-related ease, 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.”
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 Pis.’ 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 government continued to accept performance under the Assistance Agreement after discovery of the fraud. See Pis.’ 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 uneured 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 undetectable beneath the surface of acontract conceived in a tainted transaction.
Miss. Valley,
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 for 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.
Notes
. 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."
.
But see United States v. Jamieson Sci. & Eng’g, Inc.,
. 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.
. We note that the knowledge required for federal common law fraud making a contract void and discussed in supra Part III.A.2 is not required for prior material breach. See Restatement (Second) of Contracts § 235 (1981) cmt. a ("The defect need not be wil[l]ful 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.”).
. 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.