Opinion ID: 210369
Heading Depth: 2
Heading Rank: 3

Heading: Enactment of FIRREA

Text: 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, 116 S.Ct. 2432, [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, 116 S.Ct. 2432. 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. 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. 518 U.S. at 843, 858, 860, 116 S.Ct. 2432. 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, 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. 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, [i]n 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]. Appellee Br. 42. 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. XXXXXX-XX. 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, 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 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 ¶¶ 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 Pls.' Summ. J. Surreply 20-21 (Jun. 18, 2001) (discussing timeliness without disputing government's representation of procedural history). 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 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).