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

Heading: Prior Material Breach

Text: 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, 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 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, 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. 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]aiver 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 breach. 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 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, shall 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 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.