Opinion ID: 210369
Heading Depth: 2
Heading Rank: 1

Heading: Federal Common Law Fraud

Text: 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., 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, 125 S.Ct. 1478, 161 L.Ed.2d 386 (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. Id. at 214 n. 8, 125 S.Ct. 1478; see also Connor v. Finch, 431 U.S. 407, 421 n. 19, 97 S.Ct. 1828, 52 L.Ed.2d 465 (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 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, 125 S.Ct. 1478. Moreover, under these circumstances, we can exercise our discretion to apply federal common law in this case. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 99, 111 S.Ct. 1711, 114 L.Ed.2d 152 (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 rights and duties therein are governed generally by the law applicable to contracts between private individuals. Winstar, 518 U.S. at 895, 116 S.Ct. 2432. The Court has also stated that [i]t 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, 332 U.S. 407, 411, 68 S.Ct. 123, 92 L.Ed. 32 (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, 120 S.Ct. 2423, 147 L.Ed.2d 528 (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, 122 S.Ct. 1993, 153 L.Ed.2d 132 (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 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, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961), and J.E.T.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 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.
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]re 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 [n]o 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 [3] 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 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. J., 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. 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 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. 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.
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., 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.
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 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'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 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). 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.
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, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989) (relying 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., 66 N.Y.2d 782, 497 N.Y.S.2d 898, 488 N.E.2d 828, 829-30 (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, 497 N.Y.S.2d 898, 488 N.E.2d at 830 (citations omitted). 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., 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 through this arrangement because the law firm was the bank's primary outside counsel, performed mortgage 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.
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.T.S., the record demonstrated causation because [h]ad [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 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. ¶ 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 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, 106 S.Ct. 2505 (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, 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. ¶ 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.