Long Island Savings Bank, Fsb v. U.S.

• Decision Date: 01 February 2007
• Docket Number: No. 2006-5029.,2006-5029.
• Parties: The LONG ISLAND SAVINGS BANK, FSB, and the Long Island Savings Bank of Centereach FSB, Plaintiffs-Appellees, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

476 F.3d 917

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.

United States Court of Appeals, Federal Circuit.

February 1, 2007.

Richard C. Tufaro, Milbank, Tweed, Hadley, & McCloy, LLP, of Washington, DC, argued for plaintiffs-appellees. With him on the brief was William W. Wallace III. Of counsel on the brief were David S. Cohen, and Andrew M. Leblanc.

Jeffrey T. Infelise, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney General, David M. Cohen, Director. Of counsel on the brief were Jeanne E. Davidson, Deputy Director, Timothy J. Abraham, and Elizabeth A. Holt, Trial Attorneys. Of counsel was Jerome A. Madden, Attorney.

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). Because we hold the claims against the government to be forfeited under 28 U.S.C. § 2514, we reverse.

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, 116 S.Ct. 2432, 135 L.Ed.2d 964 (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. Id. 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. Id. 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. (Id. § 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, 116 S.Ct. 2432 (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 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.

LISB also represented and warranted in section 11(b)(9) (emphasis added):

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.

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 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 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 ("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) 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 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...