Free Post Trial Brief - District Court of Federal Claims - federal


File Size: 193.0 kB
Pages: 67
Date: September 18, 2006
File Format: PDF
State: federal
Category: District
Author: unknown
Word Count: 9,064 Words, 65,537 Characters
Page Size: Letter (8 1/2" x 11")
URL

https://www.findforms.com/pdf_files/cofc/9020/287.pdf

Download Post Trial Brief - District Court of Federal Claims ( 193.0 kB)


Preview Post Trial Brief - District Court of Federal Claims
Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 1 of 67

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

No. 94-522C (Judge Williams) ______________________________________________________________________________ FIRST ANNAPOLIS BANCORP, INC., Plaintiff, v. THE UNITED STATES, Defendant.

DEFENDANT'S POST-TRIAL BRIEF

STUART E. SCHIFFER Deputy Assistant Attorney General JEANNE E. DAVIDSON Deputy Director WILLIAM F. RYAN Assistant Director Of Counsel: TIMOTHY ABRAHAM MELINDA HART MARK PITTMAN DELISA M. SANCHEZ Trial Attorneys September 18, 2006 RICHARD B. EVANS Trial Attorney Commercial Litigation Branch Department of Justice 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 353-7760 Fax: (202) 305-7643 Attorneys for Defendant

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 2 of 67

TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. BANCORP IS NOT A PARTY TO A CONTRACT FOR GOODWILL OR SERVICE CORPORATION FORBEARANCES AND ANY OTHER CONTRACT TO WHICH BANCORP MAY BE A PARTY IS IRRELEVANT . . . . . . 2 THE EVIDENCE AT TRIAL PROVED THAT BANCORP COMMITTED A PRIOR MATERIAL BREACH OF ITS ALLEGED CONTRACT WITH THE GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. B. The Law Of Prior Material Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Bancorp's Alleged Contract Includes, Among Other Documents, The Applications Submitted By First Federal And Bancorp To The FHLBB . . . . . . 12 Under The Terms Of Its Alleged Contract, Bancorp Had A Duty To Ensure Shareholder Loans Were Not Used To Fund First Federal's Supervisory Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 The Shareholder Loans Represent A Prior Breach By Bancorp Of Its Alleged Contract With The Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1. 2. 3. 4. 5. 6. First Annapolis' 1990 Bank Examination . . . . . . . . . . . . . . . . . . . . . . . . 21 Continental Financial Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 The Impermissible Shareholder Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 24 The Impermissible Shareholder Loans Went Into Default . . . . . . . . . . . 28 The Bancorp Shareholders Contemplated Legal Action . . . . . . . . . . . . . 30 Bancorp Had Knowledge Of First Federal's Violation Of The Terms Of Its Conversion Application And Applicable Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

II.

C.

D.

E.

Bancorp's Prior Breach Is Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

i

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 3 of 67

III.

SHOULD THE COURT FIND THAT THE IMPROPER SHAREHOLDER LOANS PRECEDED THE FORMATION OF THE CONTRACT, THE GOVERNMENT WOULD STILL NOT BE LIABLE BECAUSE IT WOULD CONSTITUTE THE FAILURE OF A CONDITION PRECEDENT . . . . . . . 40 A. B. C. D. The Date Of Contract Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 The Existence Of The Failure Of A Condition Precedent . . . . . . . . . . . . . . . . . . 42 The Effect Of The Failure Of A Condition Precedent . . . . . . . . . . . . . . . . . . . . . 44 The Court Can Conform Its Findings To The Evidence Admitted At Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

IV.

THE GOVERNMENT HAS NEVER WAIVED ITS PRIOR MATERIAL BREACH DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 A. The Government Did Not Procedurally Waive Its Prior Material Breach Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 The Government Did Not Substantively Waive Its Prior Material Breach Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 1. The Government Did Not Voluntarily And Intentionally Relinquish Its Right To Terminate The Alleged Contract . . . . . . . . . . . . 50 The Government Did Not Have Knowledge Of The Shareholder Loans Prior to The 1990 Examination . . . . . . . . . . . . . . . . . 53

B.

2.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

ii

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 4 of 67

TABLE OF AUTHORITIES FEDERAL CASES 6247 Atlas Corp. v. Marine Ins. Co., Ltd., 923 F. Supp. 523 (S.D. N.Y. 1996), aff'd, 104 F.3d 352 (2d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Admiral Fin. Corp. v. United States, 57 Fed. Cl. 418 (2003), aff'd, 378 F.3d 1336 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Alliant Techsystems, Inc. v. United States, 178 F.3d 1260 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Ashcraft & Gerel v. Coady, 244 F.3d 948 (D.C. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Bradford Audio Corp. v. Pious, 392 F.2d 67 (2d Cir. 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Brazos Electric Power Co-op., Inc. v. United States, 49 Fed. Cl. 398 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078 (2d Cir. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Caroline Hunt Trust Estate v. United States, 65 Fed. Cl. 271 (2005), appeals argued, Nos. 05-5141, -5179 (Fed. Cir. June 9, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . 50 Cherokee Nation v. United States, 355 F.2d 945 (Ct. Cl. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 54 Christopher Village, L.P. v. United States, 360 F.3d 1319 (Fed. Cir. 2004) , cert. denied, 543 U.S. 1146, reh'g denied, 544 U.S. 992 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim College Point Boat Corp. v. United States, 267 U.S. 12 (1925) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 51 Dow Chemical Co. v. United States, 226 F.3d 1334 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 53

iii

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 5 of 67

Farmers Grain Co. of Esmond v. United States, 33 Fed. Cl. 298 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Favell v. United States, 16 Cl. Ct. 700 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Fifth Third Bank of Western Ohio v. United States, 55 Fed. Cl. 372 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 First Interstate Bank of Idaho v. Small Business Admin., 868 F.2d 340 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Foman v. Davis, 371 U.S. 178 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 47 General Eng'g & Mach. Works v. O'Keefe, 991 F.2d 775 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 George A. Fuller Co. v. Alexander & Reed, Esqs., 760 F.Supp. 381 (S.D.N.Y. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Hardin, Rodriguez & Boivin Anesthesiologists, Ltd. v. Paradigm Ins. Co., 962 F.2d 628 (7th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Hoffman v. General Motors Acceptance Corp., 814 F.2d 1385 (9th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Hometown Fin., Inc. v. United States, 409 F.3d 1360 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 32 Lincoln National Life Ins. Co. v. United States, 582 F.2d 579 (Ct. Cl. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Malone v. United States, 849 F.2d 1441 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 11 McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 39, 40 Moratzka v. United States (In re Matthieson), 63 B.R. 56 (D.Minn. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

iv

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 6 of 67

Nicholls v. Tufenkian Import/Export Ventures, Inc., 367 F.Supp.2d 514 (S.D.N.Y. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Pacific Gas & Elec. Co. v. United States, 70 Fed. Cl. 766 (Apr. 25, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Pacific States Corp. v. Hall, 166 F.2d 668 (9th Cir. 1948) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Reliance Ins. Co. v. United States, 20 Cl. Ct. 715 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 54 Reservation Ranch v. United States, 39 Fed. Cl. 696 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Royall Nat. Bank of Palestine, Tex. v. United States, 566 F.2d 1151 (Ct. Cl. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Scott Timber Co. v. United States, 64 Fed. Cl. 130 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Southern California Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Stone Forest Indus., Inc. v. United States, 973 F.2d 1548 (Fed. Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 11 Thomas v. Dep't of Housing & Urban Development, 124 F.3d 1439 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Wetsel-Oviatt Lumber Co. v. United States, 43 Fed. Cl. 748 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Williams v. Ashland Eng'g Co., 45 F.3d 588 (1st Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

v

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 7 of 67

STATE CASES Parkview General Hospital, Inc. v. Eppes, 447 S.W.2d 487 (Tex. Civ. App. Corpus Christi 1969, writ ref. n.r.e.) . . . . . . . . . . . . . . . . . . 44 Ross v. Harding, 391 P.2d 526 (Wash. 1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

RULES & STATUTES 12 C.F.R. 563b.3(a) (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12 C.F.R. 563b.3(c)(22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 12 C.F.R. 563b.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9, 18 12 C.F.R. 563b.20(c) (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12 C.F.R. 563b.24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 12 C.F.R. 563b.26(b)(2)(I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 32 12 C.F.R. 563b.29(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 32 RCFC 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 46, 47 RCFC 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

MISCELLANEOUS American Jurisprudence, Contracts 38 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 American Jurisprudence, Contracts 458 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 American Jurisprudence, Contracts 601 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 44 American Jurisprudence, Contracts 687 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 American Jurisprudence, Contracts 688 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 American Jurisprudence, Contracts 689 (2d ed. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5 Arthur Linton Corbin, Corbin on Contracts 1104 (1964) . . . . . . . . . . . . . . . . . . . . . . . . . . 10 vi

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 8 of 67

E. Allan Farnsworth, Contracts 8.15 (2d ed. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3 Moore's Federal Practice P 15.13(2) (2d ed. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Restatement (Second) of Contracts 224 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Restatement (Second) of Contracts 237 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 51 Restatement (Second) of Contracts 241 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Restatement (Second) of Contracts 243 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Restatement (Second) of Contracts 381(3) (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Restatement (First) of Contracts 275, cmt. a (1932) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 13 Williston on Contracts 38:7 (4th ed. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5 Williston on Contracts 666A (3d ed. 1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure 1278 (3d ed. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

vii

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 9 of 67

IN THE UNITED STATES COURT OF FEDERAL CLAIMS FIRST ANNAPOLIS BANCORP, INC., Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 94-522C (Judge Williams)

DEFENDANT'S POST-TRIAL BRIEF Pursuant to the Court's order dated August 8, 2006, defendant, the United States, respectfully submits its post-trial brief. At trial, we established that any breach of the contract alleged by plaintiff, First Annapolis Bancorp, Inc. ("Bancorp") by the Government was preceded by Bancorp's prior material breach of that very contract. Accordingly, the Court should enter judgment for the Government. SUMMARY OF ARGUMENT Bancorp claims that a contract was created with the Government in conjunction with its acquisition and conversion of First Federal Savings and Loan Association of Annapolis ("First Federal") on August 13, 1988, and that certain provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") breached that contract. The principal issue before the Court during the June 2006 trial was whether Bancorp materially breached the alleged contract (to the extent one existed) before the passage of FIRREA. At trial, we demonstrated that Bancorp materially failed to comply with important requirements of the alleged contract, thus committing a prior material breach, thereby precluding a finding of liability against the Government for any subsequent breach.

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 10 of 67

The evidence at trial established that First Federal made loans to numerous individuals seeking to borrow money to finance their purchase of Bancorp stock this fact cannot be disputed. As we demonstrated at trial, most, if not all, of these borrowers had no previous banking relationship with First Federal prior to seeking financing for their purchases of Bancorp stock. We also established that, at the time of their loan settlements, these investors received checks which they immediately endorsed over to Bancorp. Indeed, both the testimony and documentary evidence established that no money changed hands during these transactions. First Federal simply moved the money from one account to another while funding the purchases of Bancorp stock by various investors identified by Edward Wayson. As explained more fully below, the evidence adduced at trial also demonstrated that First Federal's actions making loans to finance its own conversion were prohibited by the applicable thrift regulations, by which Bancorp pledged to abide in the very documents it contends constitute the contract in this case. Officers of both First Federal and Bancorp certified to the regulators that they had complied with all applicable laws and regulations in effectuating the conversion; however, the loans to shareholders proved otherwise. These false representations were material to any contract that may have arisen between the parties concerning the conversion and, as we explain more fully below, they relieve the Government from liability for any subsequent breach. I. BANCORP IS NOT A PARTY TO A CONTRACT FOR GOODWILL OR SERVICE CORPORATION FORBEARANCES AND ANY OTHER CONTRACT TO WHICH BANCORP MAY BE A PARTY IS IRRELEVANT Before turning to Bancorp's prior material breach, we reiterate that Bancorp's breach of contract claim should be rejected for the more fundamental reason that the contract it alleges in 2

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 11 of 67

this case for goodwill and service corporation investment forbearances never existed and, even if it did, Bancorp was never a party to it. Tellingly, none other than Mr. Parran himself, who at all applicable times was either the Executive Vice President or President of First Federal, First Annapolis Savings Bank ("First Annapolis"), and Bancorp, as well as an authorized agent and Director of Bancorp, and, by his own description, the individual who was "primarily responsible, on behalf of Bancorp," for interacting with the Federal Home Loan Bank Board ("FHLBB") in connection with First Federal's supervisory conversion, admitted unequivocally in his deposition that there was no agreement to count goodwill toward regulatory capital. Parran Aff. (Jan. 22, 2003); Parran Dep. (May 14, 2003) at 73. Because we have discussed this issue extensively in prior pleadings, we will not duplicate that discussion here. A few points, however, should be mentioned. Although the parties have filed cross-motions for summary judgment as to liability regarding Bancorp's breach of contract claim (among others), the Court has yet to rule on these motions. At times, this made the contours of the recent trial somewhat nebulous, as it was (and remains) unclear, for example, exactly which documents constitute Bancorp's alleged contract (more on this below) and what the effective date of the contract was for purposes of analyzing this case under the rubric of a prior material breach or the failure of a condition precedent (more on this below as well). Tr. 835-41, 851-53. Nevertheless, we proceeded to trial only by assuming for purposes of argument that Bancorp is a party to an alleged contract with the Government. This assumption was then, and continues to be, ill-founded, as any contract Bancorp may have with the Government, if it has one at all, would not entitle it to the relief it seeks. 3

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 12 of 67

Indeed, recent case law from the United States Court of Appeals for the Federal Circuit, issued after the parties completed their liability briefing, further confirms this conclusion. In Southern California Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005) ("SoCal"), several individual shareholders were among the plaintiffs who sued the Government for the breach of a Winstar-type contract. Of the three primary documents constitutes the alleged contract in that case, the individual plaintiffs were parties only to the regulatory capital maintenance agreement ("RCMA"), not the assistance agreement or a forbearance letter incorporated by reference into the assistance agreement. SoCal, 422 F.3d at 1325-26. As in this case, it was the forbearance letter in SoCal, not the RCMA, that contained the relevant language allowing the thrift to depart from generally accepted accounting principles when accounting for its goodwill and capital credits. Id. at 1326. By applying "an expansive reading" to the agreements at issue, the trial court in SoCal determined that the above three documents were "components of one overall contract to which the Individual Plaintiffs were a party." Id. at 1329. It then held that the "government's promises regarding the treatment of supervisory goodwill and capital credits [ran] to all parties to the overall contract and determined that the Individual Plaintiffs had standing to recover." Id. In reversing the trial court on this issue, the Federal Circuit rejected the theoretical underpinnings of the individual plaintiffs' standing argument. Specifically, it held that a party to one contract cannot "be deemed a party to a related contract simply because the separate contracts constitute components of one transaction." Id. at 1330. This is so even though execution of the RCMA was an "express condition to FSLIC's obligations under the Assistance Agreement." Id. at 1326. Nor was it relevant to the court of appeals that the individual plaintiffs 4

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 13 of 67

"initiated the conversion and acquisition," that "at least some of them negotiated directly with the government in arranging the transaction," or that the Government was aware that the individual plaintiffs "would be supplying the money to rehabilitate [the thrift]" and would be the primary shareholders of the thrift's holding company. Id. at 1331. As the Federal Circuit concluded, "these roles of negotiator and shareholder do not bring the Individual Plaintiffs into privity of contract with the government in regards to the Assistance Agreement entered into with [the holding company] and [the thrift]." Id. Although the Court found that the individual plaintiffs were, in fact, in contractual privity with the Government under the RCMA, the problem was that they were not entitled to the particular damages they sought the dilution and extinguishment of their ownership interest in the holding company based upon the breach of that contact. Id. at 1333. The Court rejected the individual plaintiffs' argument that the incorporation of the capital credit promise into the terms of the RCMA was sufficient to uphold the damages award. Id. at 1334. This theory, the Court explained, failed to recognize that the damages the individual plaintiffs sought to recover "were not caused by the obligations they incurred under the RCMA" because the RCMA "did not require [them to] invest in [the holding company]." Id. "At the most," the RCMA obligated the individual plaintiffs to contribute a certain minimum amount of cash only in the event that the thrift did not maintain its regulatory capital at the required level. Id. Because there was "no indication that the government ever enforced this guarantee or that the Individual Plaintiffs ever complied with its terms," the individual plaintiffs could not recover their claimed damages under the RCMA. Id.

5

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 14 of 67

The analysis in SoCal is directly applicable here. As in SoCal, the only document to which Bancorp was a party (other than its own holding company application) was the RCMA. Yet, just as in SoCal, that document contains none of the contractual promises that Bancorp claims the Government breached when Congress passed FIRREA. At most, as the court of appeals put it in SoCal, the RCMA in this case obligated Bancorp to maintain First Annapolis' regulatory capital at a specified level. Although the RCMA defines "regulatory capital" by referring to First Annapolis' business plan, which was submitted with the plan of conversion, JX 99 at WOQ280 1446, this is insufficient to sustain any award of damages in favor of Bancorp because, as in SoCal, the damages that Bancorp seeks restitution for the capital it downstreamed to First Annapolis as part of the supervisory conversion and lost profits were not caused by the obligations that Bancorp incurred under the RCMA. Again, as in SoCal, the RCMA in this case did not contractually require Bancorp to make the initial capital contribution to First Federal and at no time did the Government ever force Bancorp to make a subsequent capital contribution pursuant to the terms of the RCMA. JX 99. Finally, even though Bancorp was the sole shareholder of First Annapolis and may view itself as a "negotiator" with the Government regarding First Federal's supervisory conversion, these facts alone do not bring Bancorp into privity with the Government regarding some other contract between the Government and First Annapolis (the existence of which we dispute) that actually contains the relevant goodwill and service corporation forbearances. SoCal, 422 F.3d at 1331. To the extent that a contract exists between the Government and First Annapolis based upon the forbearance letters and resolutions, and to the extent that a separate contract exists 6

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 15 of 67

between the Government and Bancorp based upon the RCMA, Bancorp cannot be deemed a party to the former simply because the two contracts "constitute components of one transaction." Id. at 1330. In short, Bancorp is not a party to any contract with the Government regarding goodwill or service corporation forbearances, which are the only contractual "promises" relevant to this case. Instead, the only contract to which Bancorp conceivably is a party (i.e., the RCMA) was not breached by the Government and, even if it was, would not entitle Bancorp to the damages it now seeks. Accordingly, the Court should dismiss Bancorp's breach of contract claims in their entirety for these reasons alone. II. THE EVIDENCE AT TRIAL PROVED THAT BANCORP COMMITTED A PRIOR MATERIAL BREACH OF ITS ALLEGED CONTRACT WITH THE GOVERNMENT Should, however, the Court find that Bancorp is in privity with the Government to some "overall" contract containing the supervisory goodwill and service corporation forbearances (as well as the FHLBB resolutions, RCMA, and other documents), we still would not be liable to Bancorp for the breach of that contract because, as we proved during the recent trial in this case, Bancorp committed a prior material breach of that contract. At trial, we solicited uncontradicted testimony that, despite Bancorp's previous and repeated denials, several Bancorp shareholders obtained loans from First Federal for the express purpose of funding their purchase of Bancorp stock as part of First Federal's supervisory conversion. These loans, of course, were in addition to the numerous other shareholder loans discovered by William Crompton during his 1990 examination of First Annapolis. DX 397 at WOT315 0147-48. All told, more than 25 percent of Bancorp's total stock offering was financed by loans from First Federal. Id. at WOT315 0147. 7

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 16 of 67

Regardless of the individual or cumulative amount, though, any loan issued by a converting thrift to be used for buying stock in the thrift's holding company constituted, as explained by our regulator witnesses, an extremely serious and fatal violation of then-existing regulations, by both the thrift and the holding company. Tr. 55 (Zimmerman). This is because a loan of this type struck at the very heart of a supervisory conversion, which was to bring in new, unfettered capital into the institution. Tr. 43-44, 49-50, 62, 123-24 (Zimmerman). By issuing loans to finance the conversion, the thrift and its holding company were doing nothing more than "just changing bank drawers." Tr. 62 (Zimmerman). Consequently, had the regulators known First Federal was making loans to individuals for the purpose of buying stock in Bancorp, they immediately would have taken action to stop the conversion. Tr. 55, 94, 121-22 (Zimmerman); 578, 603, 606-07 (G. Jones). That Bancorp had a duty under the terms of the contract it has alleged to ensure that First Federal did not issue shareholder loans cannot be seriously disputed.1 Not only do the
1

At various times throughout this case, Bancorp has argued that this duty ran, and therefore any breach of that duty is attributable, only to First Federal, not Bancorp. This argument is flawed on several levels. First and foremost, this duty is, as we explain below, an explicit term of Bancorp's alleged contract. As discussed at length above, the Court should find either that the facts in this case do not give rise to a contract regarding goodwill and service corporation forbearances or, at the very least, that Bancorp is not a party to any such contract. But if the Court does find Bancorp is a party to such a contract, then Bancorp must be bound by all the terms of that contract, not just those that are most convenient to Bancorp's cause. Bancorp cannot have it both ways. If the goodwill and service corporation forbearances apply to Bancorp (which, as a matter of logic and accounting, they should not), then the prohibition against using shareholder loans to fund the conversion applies to Bancorp too, as it is part and parcel of Bancorp's alleged contract that contains those forbearances. In addition, as we also explain below, the then-existing regulations plainly held holding companies being formed in connection with a supervisory conversion, such as Bancorp, accountable for transgressions of the FHLBB's supervisory conversion requirements as when, for example, improper shareholder loans were used to fund a conversion. See 12 C.F.R. 8

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 17 of 67

alleged contractual documents expressly require Bancorp to comply with all applicable regulations pertaining to a supervisory conversion in general, including the regulation forbidding shareholder loans, see 12 C.F.R. 563b.3(c)(22), but, even more particularly, Bancorp specifically represented to the Government, in one of the documents that Bancorp itself previously has claimed to be part of the contract in this case, that First Federal would not "loan funds or otherwise extend credit to any person to purchase shares of [Bancorp]" stock offered as part of First Federal's conversion. JX 87 at WOT415 0499. Just as importantly, there can be no dispute that Bancorp's breaches of these provisions of its alleged contract with the Government are material. Indeed, because the regulators never would have allowed the supervisory conversion to go forward if they had known about the shareholder loans, it is hard to imagine a breach that could go any more directly to the essence of the contract. See Hometown Fin., Inc. v. United States, 409 F.3d 1360, 1370 (Fed. Cir. 2005) ("A breach is material when it relates to a matter of vital importance or goes to the essence of the contract."). For all of these reasons, discussed more fully below, the Court should find that the Government is not liable to Bancorp due to Bancorp's prior material breach. A. The Law Of Prior Material Breach

In general, a material breach by one party to a contract permits the non-breaching party to discontinue performance under the contract. Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1276 (Fed. Cir. 1999); Stone Forest Indus., Inc. v. United States, 973 F.2d 1548, 1550 (Fed. Cir. 1992). Therefore, where a plaintiff materially breaches a contract to which it is a party, the defendant is excused from liability for any subsequent breach it may have committed.

563b.3(c)(22), 563b.9. 9

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 18 of 67

College Point Boat Corp. v. United States, 267 U.S. 12, 15 (1925); Hometown, 409 F.3d at 1370; Christopher Vill., L.P. & Wilshire Inv. Corp. v. United States, 360 F.3d 1319, 1334 (Fed. Cir. 2004) (citing Restatement (Second) of Contracts 237, cmt. b (1981); E. Allan Farnsworth, Contracts 8.15 at 439 (2d ed. 1990)), cert. denied, 543 U.S. 1146, reh'g denied, 544 U.S. 992 (2005); Admiral Fin. Corp. v. United States, 57 Fed. Cl. 418, 432 (2003), aff'd on other grounds, 378 F.3d 1336, 1345 (Fed. Cir. 2004). Whether a party to a contract committed a prior material breach is a mixed question of law and fact. Hometown, 409 F.3d at 1369. "The legal aspect of the question flows from the proper interpretation of the contract, while the factual aspects of the question flow from the parties' conduct what they did, or did not, do." Id. To determine whether a prior breach is "material," the Court must consider "the nature and effect of the violation in light of how the particular contract was viewed, bargained for, entered into, and performed by the parties." Stone Forest, 973 F.2d at 1551; see also Farmers Grain Co. of Esmond v. United States, 33 Fed. Cl. 298, 300 (1995). In other words, the Court determines whether a breach is material "in light of the totality of events and circumstances." Stone Forest, 973 F.2d at 1552 (citing Restatement (Second) of Contracts 241, cmt. a (1981)). "A breach is material when it relates to a matter of vital importance or goes to the essence of the contract." Hometown, 409 F.3d at 1370; Thomas v. Dep't of Housing & Urban Development, 124 F.3d 1439, 1442 (Fed. Cir. 1997) (citing 5 Arthur Linton Corbin, Corbin on Contracts 1104 (1964)). In addition, "the extent to which the behavior of a party failing to perform . . . comports with standards of good faith and fair dealing" is a meaningful factor in determining whether a breach is material. Malone v. United States, 849 F.2d 1441, 1445 (Fed. 10

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 19 of 67

Cir. 1988) (citing Restatement (Second) of Contracts 241(e) (1981)); see generally Restatement (Second) of Contracts 241 (1981) (listing as "materiality" factors: "(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing"). Importantly, the "materiality" of a breach does not depend upon whether the breach results in a financial loss to the non-breaching party. Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 620-21 (2000). Rather, the question is whether the breach substantially deprived the non-breaching party of the benefit of the bargain it struck. Id. at 621 (citing Restatement (Second) of Contracts 243 (1981)). For this same reason, materiality cannot simply be equated to the proportion of performance completed by a party. Stone Forest, 973 F.2d at 1552 (holding party materially breached contract by denying access to 15.89 percent of lumber originally bargained for after other party had completed 50 percent of its performance) (citing Restatement (First) of Contracts 275, cmt. a (1932) (regarding materiality, it is "impossible to lay down a rule that can be applied with mathematical exactness")). Although any degree of fraud is material as a matter of law, a prior material breach does not require proof that the breaching party had a fraudulent intent in making a misrepresentation related to a contractual obligation. Christopher Village, 360 F.3d at 1335. Indeed, a 11

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 20 of 67

misrepresentation is material so long as it has a natural tendency to influence or is capable of influencing an action by the Government. Id. at 1336. B. Bancorp's Alleged Contract Includes, Among Other Documents, The Applications Submitted By First Federal And Bancorp To The FHLBB

Because Bancorp's counsel raised the issue during the recent trial, and because it is directly relevant to Bancorp's prior material breach and misrepresentations, we review briefly the various documents that constitute Bancorp's alleged contract with the Government.2 Specifically, despite Bancorp's sudden and opportunistic about-face at trial, the applications that Bancorp and First Federal concurrently filed with the FHLBB to approve First Federal's supervisory conversion and Bancorp's related acquisition of First Federal are, under Bancorp's theory of its case, necessarily part of its alleged contract with the Government. During closing arguments immediately after the trial in this case, the Court and Bancorp's counsel had a colloquy about whether Bancorp's application should be considered one of the contract documents. Tr. 851-56. In response to one of the Court's questions during this discussion, Bancorp's counsel stated: "I have this curious notion that the litigants should take positions and stick with them." Tr. 855. We could not agree more. Nonetheless, when the Court asked Bancorp's counsel point blank: "Wouldn't the application have constituted the offer?" tr. 851-52, Bancorp's counsel answered: "It would have to put it in contract terms, it would have constituted a solicitation to offer. . . . It is a prelude to the ultimate offer." Tr. 852. Following up on this, the Court asked: "What was the ultimate
2

To repeat, we do not believe that any of the documents in this case, collectively or individually, give rise to a contract, and certainly not one involving goodwill and service corporation forbearances to which Bancorp is a party. Nevertheless, we will assume the Court finds this to be the case for present purposes. 12

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 21 of 67

offer?" Inexplicably, and with no further elaboration, Bancorp's counsel replied that the "ultimate offer . . . is that which is established by the Bank Board resolutions plus the RCMA. And there are some other letters, Judge, I'd have to go back to the summary judgment papers, but it seemed to me there were five or six documents that we say comprise the contract." Id. Then, the following colloquy occurred: The Court: Mr. Cooter: The Court: Mr. Cooter: The Court: Mr. Cooter: Right. And is the application in any part? Is not one of them. In any part, is it incorporated by reference into anything? Nope, nope. Relied upon in anything? Nope, not in my I haven't gone back and read these this afternoon, obviously, but having said that, I do not believe so.

Tr. 852-53. Bancorp's counsel stated, without any qualifications, that "the original application, November 5, `87, . . . is not was never alleged to be part of the contract documents, we've never you can read the summary judgment pleadings for yourself. It does not constitute part of the offer and acceptance for sure." Tr. 854. As it turns out, this representation is diametrically opposed to what Bancorp argued in those very same summary judgment briefs: Indeed, in its summary judgment papers, Bancorp repeatedly referred to the application as being not just part of its alleged contract, but specifically being the offer to contract. For example, in a supplemental brief Bancorp filed regarding liability in this case, it stated, quite succinctly, that "Bancorp's Application was, in effect, the offer, which was accepted when the Government approved the transaction." Pl. Reply to Def. Supp. Memo. & Opp. to Def. Cross-Mot. for Sum. J. on Liability (June 28, 2001) ("Pl. June 28, 2001 Br.") at 13. A few sentences later in this same brief, Bancorp repeated that the "Business Plan (Bancorp's Exhibit 2) was part of in [sic] the Application, Bancorp's offer to the Government" 13

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 22 of 67

and that the "Business Plan (and the Application with which it was submitted) was part of the factual records of this case which shows [sic] the intent to contract with the government for specified treatment of goodwill." Id. (emphasis added); see also id. at 17 (citing application as one of numerous documents that allegedly "evidence an intent by the parties to" contract for specified treatment of supervisory goodwill). As recently as 2003, Bancorp continued to insist that the application was part of its alleged contract, stating that the "two FHLBB Resolutions and four forbearance letters, along with the Application, Business Plan, RCMA, letters from the accountants and the February 9, 1989 approval letter by the FHLBB . . . set forth the terms of the contract." Pl. Supp. Br. in Response to the Oct. 9, 2003 Order of This Court (Oct. 31, 2003) ("Pl. Oct. 31, 2003 Br.") at 13 (emphasis added). Bancorp has made similar claims throughout the history of this case. See id. at 15; Pl. Supp. Br. in Support of Its Mot. for Entry of J. on Liability (May 14, 2001) ("Pl. May 14, 2001 Br.") at 16-17; Pl. Supp. Memo. in Opp. to Def. Mot. to Dismiss & Reply Br. in Support of Pl. Mot. for Sum. J. on Liability (Mar. 15, 2004) at 4-5 (relying on the fact that the FHLBB resolutions reference the application and that Bancorp submitted its own holding company application as evidence of a contract between Bancorp and the Government); Pl. Oct. 31, 2003 Br. at 22 (same).3
3

Bancorp's other newly-minted theory, raised for the first time in this ten-year-old litigation at closing arguments that the FHLBB resolutions and the RCMA somehow constituted the offer also directly contradicts Bancorp's earlier allegations. Indeed, Bancorp previously professed that the resolutions constituted the acceptance, not the offer: "Upon passage of these Resolutions, the contract was formed. No further FHLBB approval was necessary and all the material terms had been agreed upon by the parties." Pl. May 14, 2001 Br. at 7; see id. at 16-17 (arguing that the business plan, which was submitted with the application, was the offer and that the resolutions, forbearance letters, and RCMA constituted the acceptance); Pl. June 28, 2001 Br. at 13 (same). 14

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 23 of 67

Of course, despite its recent change of positions, Bancorp's original position that the application is one of the documents to its alleged contract is the only one that makes any sense under the facts of this case (assuming its "overall contract" theory is accepted). First and foremost, the FHLBB resolutions, which Bancorp still believes are part of its contract, specifically refer to compliance with the application as a condition of approval. As we pointed out in our contentions of fact, Resolution Number 88-603 conditioned the FHLBB's approval of the supervisory conversion and Bancorp's acquisition of First Federal upon, among other things, an opinion of independent legal counsel that the conversion, merger, and acquisition would be completed: in compliance with the terms of this Resolution (and to the extent consistent therewith, the applications, the Plan of Voluntary Supervisory Conversion, the Agreement and Plan of Reorganization, the Plan of Merger and combination), applicable state and federal laws and regulations as administered by the [FHLBB] and FSLIC [i.e., the Federal Savings and Loan Insurance Corporation], and the charter and bylaws of [First Annapolis]. JX 93 at PFA010 0099-0100 (emphasis added). This condition (as well as the recitals of this resolution, see id. at PFA010 0093) not only required compliance with "the applications" in general, but it specifically required compliance with the plan of conversion. As we discuss below, it is in the plan of conversion that Bancorp represented that First Federal would not loan funds to anybody for the purpose of purchasing Bancorp stock. JX 87 at WOT415 0491, 0499.

Besides being a reversal of its previous position, Bancorp's notion that the resolutions and the RCMA constituted the offer is simply untenable. If that is correct, then what is the acceptance? Bancorp's counsel provided no answer to this question. 15

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 24 of 67

Furthermore, Bancorp itself previously has argued that the RCMA the one and only document to which Bancorp is actually a signatory "incorporates the terms of the Business Plan regarding the regulatory capital requirements for First Annapolis." Pl. June 28, 2001 Br. at 2; see id. at 13 (arguing that the business plan was incorporated into the RCMA and two of the forbearance letters). The relevant provision of the RCMA actually refers to the "Business Plan of the Plan of Conversion." JX 99 at WOQ280 1446. And the plan of conversion is, in turn, Exhibit A to Bancorp's holding company application.4 JX 87 at WOT415 0468, 0491, 0492, 0514. More generally, it must be remembered that this was a voluntary supervisory conversion. First Federal and Bancorp, not the Government, initiated this process when they submitted their respective applications. Thus, to the extent any contract was formed between Bancorp and the Government in connection with First Federal's supervisory conversion and again, we stress that no contract was, in fact, formed with Bancorp relating to goodwill and forbearances the only sensible way to view the alleged contract is, as Bancorp has argued all along (until its counsel's comments during closing arguments), to consider Bancorp's application as the offer, which the Government then accepted when it conditionally approved the application in the resolutions.

If, for some reason, Bancorp should try to distinguish between its holding company application and First Federal's supervisory conversion application, such a distinction would be meaningless. By its own terms, Bancorp's holding company application was submitted in conjunction with, and "as part of," First Federal's supervisory conversion application. JX 83 at WOT520 0133-34. 16

4

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 25 of 67

C.

Under The Terms Of Its Alleged Contract, Bancorp Had A Duty To Ensure Shareholder Loans Were Not Used To Fund First Federal's Supervisory Conversion

It is little wonder that Bancorp seeks to distance itself from its own application as that is where Bancorp explicitly acknowledged its responsibility to insure First Federal did not "loan funds or otherwise extend credit to any person to purchase shares of [Bancorp] Stock offered in the Conversion." JX 87 at WOT415 0499. Because, as we have demonstrated above, Bancorp's application is necessarily part of Bancorp's alleged contract with the Government, this provision of that application, by itself, establishes that Bancorp had a contractual duty not to allow its stock to be purchased with the proceeds of loans from First Federal. Even so, this same duty is expressed in many of the other documents that, according to Bancorp, form its contract. For example, in the RCMA which is, again, the only document styled as an agreement or contract to which Bancorp is a party Bancorp warranted that the information it had given to the FSLIC, and upon which the FSLIC had relied, in connection with Bancorp's acquisition of First Federal was "true, accurate, complete and current in all material respects." JX 99 at WOQ280 1447. Included in that information, of course, was Bancorp's representation in its application that First Federal would not loan funds to any individual to purchase Bancorp stock. JX 87 at WOT415 0499. As Mr. Zimmerman explained, this provision in the RCMA was "directly related" to Bancorp's compliance with the regulations prohibiting the use of shareholder loans to fund a conversion. Tr. 81-82 (Zimmerman). Yet, on the very same day that Douglas Parran signed the RCMA on behalf of Bancorp August 12, 1988 Mr. Parran personally was approving loans to

17

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 26 of 67

individuals such as Paul Jones on behalf of First Federal for the sole purpose of selling Bancorp stock offered in connection with First Federal's conversion. Tr. 347-50, 377-78 (Parran). More generally, several of the alleged contractual documents obligated Bancorp to comply, or to represent that it had complied, with any applicable FHLBB and FSLIC rules and regulations regarding supervisory conversions. JX 83 at WOT520 0127 (supervisory conversion application); JX 93 at PFA010 0100 (Resolution No. 88-603); DX 224 at PFA010 1644 (letter dated Oct. 14, 1988 from Bancorp's and First Annapolis' special counsel). As we have discussed in our prior pleadings, these regulations, among other things, forbade an institution undergoing a supervisory conversion from loaning funds "to any person to purchase the capital stock of the institution." 12 C.F.R. 563b.20(c), 563b.3(a), 563b.3(c)(22) (1988). This same prohibition applied equally to a holding company being formed in connection with a thrift's supervisory conversion. See id. 563b.9. As was any other holding company being formed as part of a supervisory conversion, Bancorp thus was bound by these regulations not to use improper shareholder loans to finance that conversion. More importantly, though, under Bancorp's theory, this regulatory requirement is also a contractual duty because, even under the strictest interpretation, the plain terms of the documents that Bancorp says form its contract with the Government expressly required Bancorp to comply with all applicable regulatory requirements, including, by definition, the one prohibiting financing the purchase of Bancorp stock with loans from First Federal. Despite the clarity of these documents and regulations, however, Bancorp at times has argued that the regulations required only that the plan of conversion contain a representation that improper shareholder loans would not be made. According to Bancorp, whether the 18

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 27 of 67

representation was true is irrelevant. Alternatively, Bancorp has argued that any duty not to finance the conversion with shareholder loans ran only to First Federal, not Bancorp. These arguments are meritless. Bancorp's suggestion that it could use all of the improper shareholder loans it wanted to finance First Federal's supervisory conversion, so long as it said it would not do so in the plan of conversion, is obviously wrong. If this position were accepted, it would reduce one of the, if not the, most important regulations governing a supervisory conversion to empty formalism. Even Bancorp's own former president could not subscribe to this notion and testified that he understood at the time of First Federal's conversion that it was a violation of regulations to issue loans to individuals to purchase stock in the conversion. Tr. 346-47 (Parran). And certainly the regulators at the time understood this to be the case as well. Tr. 49-50 (Zimmerman); Tr. 606 (G. Jones). Apart from the regulations themselves and the understanding of the parties at the time, the very documents that Bancorp claims to constitute its contract with the Government, as set forth above, required Bancorp to comply with the actual terms of its application and the attached plan of conversion. Bancorp could not just submit a plan of conversion with empty promises and be done with it. For all of these same reasons, Bancorp's argument that any duty regarding shareholder loans ran only to First Federal, and not Bancorp, is equally unavailing. The regulations specifically applied to holding companies formed in connection with a supervisory conversion, unless clearly inapplicable. Again, Bancorp's position, if accepted, would render those regulations meaningless, as it would allow thrifts to avoid complying with virtually all of them 19

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 28 of 67

through the simple expedient of creating a holding company. As noted above, the regulators at the time understood that the prohibition against shareholder loans applied to holding companies. Tr. 57-58 (Zimmerman); Tr. 605-06 (G. Jones). And, once again, Bancorp itself understood this to be the case at the time, which is why its representation in its application that First Federal will not loan funds to individuals to buy Bancorp stock mimics the language of the regulations, except, importantly, it refers to the holding company's stock, rather than the thrift's stock. Compare JX 87 at WOT415 0499 with 12 C.F.R. 563b.3(c)(22). As an additional measure to ensure compliance, the FHLBB required that First Federal's officers and directors, including Mr. Parran, certify that they had "made such examination and investigation as is necessary to enable [them] to express an informed opinion that [First Federal's] Application complies to the best of [their] knowledge and belief with the applicable requirements of Part 563b of the Rules and Regulations for Insurance of Accounts and forms thereunder . . . ." JX 83. This certification that was executed by First Federal was confirmed by First Federal's legal counsel who signed a separate certificate certifying that the transaction was consummated in accordance with all applicable laws, the conversion application, and the FHLBB resolutions approving the transaction. DX 224; see also Tr. 83-85 (Zimmerman). Both certifications were required to secure FHLBB approval of First Federal's conversion application. If the Court accepts Bancorp's theory and finds that the Government owed a duty to Bancorp regarding goodwill and service corporation forbearances, then Bancorp must be bound by any reciprocal duties contained in the same documents that form Bancorp's "overall" contract with the Government. At a minimum, the terms of those documents unmistakably imposed upon

20

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 29 of 67

Bancorp (and First Federal) a duty to ensure that Bancorp's stock was not purchased with the proceeds of loans obtained from First Federal. D. The Shareholder Loans Represent A Prior Breach By Bancorp Of Its Alleged Contract With The Government

Even more clear than Bancorp's duty to avoid using improper shareholder loans to finance its stock offering is the fact now undisputed by Bancorp itself that Bancorp deliberately and repeatedly breached that duty at the time of the conversion when several individuals applied for, and received, loans from First Federal for the specific purpose of buying Bancorp's stock as part of First Federal's conversion. The undisputed testimony and evidence presented at trial, described more fully below, not only demonstrates that Bancorp breached its contract by doing exactly what it said it would not do, but also demonstrates that Bancorp made deliberate misrepresentations to the FHLBB, when it warranted that the information it had provided was truthful and accurate and certified that it would comply with all applicable rules and regulations on the very same day, no less, that it was knowingly using the proceeds of shareholder loans to purchase its stock. 1. First Annapolis' 1990 Bank Examination

Notwithstanding the above mandatory regulations and First Federal's certification that its conversion application complied with all applicable regulations, the evidence at trial demonstrated that OTS examiners uncovered material regulatory violations involving First Federal, First Annapolis, and Bancorp. William Crompton, examiner-in-charge of First Annapolis's 1990 bank examination, testified that: During the course of the review, we noted that the bank had made a series of loans to a group of individuals who we knew had also 21

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 30 of 67

purchased stock in the bank. And during the course of our review, we noted that in some instances, the timing of their loans - of receiving loans from First Annapolis corresponded with the timing of the stock conversion. Tr. 674 (Crompton). As discussed above, these were loans to Bancorp shareholders that were in direct violation of the FHLBB's regulatory prohibition against a converting institution loaning funds to finance its own conversion. Mr. Crompton wrote the following summary of the OTS' findings on this issue; Based upon the examiner's review, it became evident that the bank had either directly at the time, or subsequently funded a significant portion of the stock sale by granting loans to various stockholders in amounts generally equal to the amount of the stock purchased. In total, the examiner has identified such loans made between July 22, 1988 and January 5, 1989 to 12 stockholders who had collectively purchased $3, 975, 000, or 28.1 percent of the stock issued. DX 397 at WOT315 0147 (emphasis added); Tr. 674-77 (Crompton). These impermissible shareholder loans, which were discovered by the thrift examiners reviewing First Annapolis' commercial loan register, were not previously discovered because: [they] were made during the course of the [1988] examination, not prior to the examination. . . . When [the FHLBB does] an exam, it's as of the as-of date, which would be the financial period ending prior to [the] examination. So when we do an examination, we'll get a list of all the loans on the books as of the quarter-end period but . . . that list would not be carried forward to loans granted during the course of an exam. Tr 674, 677-78 (Crompton). Although Mr. Crompton did not remember the specific "as-of" date for First Annapolis's 1988 exam, he testified that "[i]t would have been either June 30 or March 31, 1988," which preceded the July 22, 1988 through January 5, 1989 time frame when the impermissible shareholder loans occurred. Tr. 678 (Crompton). 22

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 31 of 67

2.

Continental Financial Holdings, Inc.

Pursuant to the viability test under 12 C.F.R. 563b.26(b)(2)(I), approval of First Federal's conversion application was conditioned upon an infusion of sufficient capital to achieve a one percent net worth to liabilities ratio after First Federal's conversion. To achieve this mandate, First Federal initially partnered with Continental Financial Holdings, Inc., a Maryland company that agreed to purchase 50 percent of the outstanding stock of Bancorp. Nevertheless, at a June 22, 1988 board of directors meeting, First Federal decided to forego this significant infusion of new capital by limiting the ownership percentage of any one shareholder to 9.9 percent of all outstanding Bancorp stock. Tr. 326-28 (Parran); JX 25 at PFA011 1857. Consequently, First Federal had just a few weeks to raise more than $6 million in new capital to fund its conversion. Id. Any failure to raise this capital would have prevented the FHLBB from lawfully approving First Federal's supervisory conversion application. See 12 C.F.R. 563b.29(d); 12 C.F.R. 563b.24. At trial, Mr. Parran testified that, after the June 22, 1988 meeting he "asked [Mr. Wayson] to help raise [the] capital" needed for FHLBB approval of the conversion. Tr. 339 (Parran). Mr. Wayson promptly set about this task by informing two acquaintances, E. Patrick Cole and Paul Jones, about the opportunity to investment in Bancorp. Both Mr. Cole and Mr. Jones not only accepted Mr. Wayson's invitation, but each informed their business associates and friends about this investment opportunity. See, e.g., Tr. 156 (Cowdrey); Tr. 415 (Howard); Tr. 424 (W. Jones); Tr. 486 (Horrigan).

23

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 32 of 67

3.

The Impermissible Shareholder Loans

E. Patrick Cole, who at the time was the managing partner of an investment partnership called Rental Management Associates ("RMA"), informed his RMA partners Peter Horrigan, Roger Howard and Marvin Taylor, Jr. about the investment opportunity with Bancorp. Tr. 407, 414-15 (Howard); Tr. 483, 486-87 (Horrigan); Tr. 537-38, 548-49 (Taylor). Each partner owned a 25 percent share of RMA. Tr. 407 (Howard); Tr. 483 (Horrigan); Tr. 538 (Taylor). Although RMA was primarily involved in real estate investments and had not previously invested in a banking institution, Messrs. Horrigan, Howard, and Taylor relied upon Mr. Cole's recommendation, and agreed to purchase Bancorp stock. Tr. 407, 414-15 (Howard); Tr. 486-87 (Horrigan). In August 1988, First Federal's Management Committee approved a $1 million commercial loan to RMA made subject to the personal guarantee of each RMA partner. JX 76; Joint Fact. Stip. 11. The RMA partners also signed a $1 million commercial promissory note on August 10, 1988 that was payable to First Federal. JX 106; Joint Fact. Stip. 12. The result of these transactions was that each RMA partner owned 250,000 shares of Bancorp stock as of August 12, 1988, which was funded by RMA's $1 million dollar loan. Tr. 228 (P. Jones); Tr. 409-10, 413-14 (Howard); Tr. 490-91 (Horrigan); Tr. 535, 539-40 (Taylor); DX 171; JX 131; JX 133; Joint Fact. Stip. 13. By funding this purchase of Bancorp stock, First Federal knowingly violated applicable conversion regulations and the express terms of its own conversion application. Tr. 346-47 (Parran); 12 C.F.R. 563b.3(c)(22); JX 87 at WOT415 0491, 0499. First Federal's $1 million loan to RMA was securitized by joint property interests of the RMA partners. Mr. Cole, as the managing partner of RMA, executed an indemnity deed of trust 24

Case 1:94-cv-00522-MCW

Document 287

Filed 09/18/2006

Page 33 of 67

on August 10, 1988. Tr. 412-13 (Howard); Tr. 550 (Taylor). The deed of trust specifically acknowledged that it was in consideration of the $1 million loan approved by First Federal for RMA partners Cole, Howard, Horrigan, and Taylor. JX 108. Consistent with Mr. Cole's actions, Paul Jones made the decision to invest in Bancorp. With no previous banking relationship with First Federal, on or about August 11, 1988, Paul Jones submitted a $125,000 loan application for First Federal with the stated purpose being an "investment." Tr. 237-40, 242-44 (P. Jones); JX 110; JX 118; DX 180; DX 183. First Federal approved Paul Jones' loan application the following day on August 12, 1988, and on that same day, Mr. Jones executed a commercial promissory note for $125,000. JX 76; JX 116; JX 119; JX 120. At trial, Mr. Jones testified that his $125,000 loan was used to fund his purchase of 125,000 shares of Bancorp stock on August 12, 1988. Tr. 225 (P. Jones). However, Paul Jones' investment was not limited to 125,000 Bancorp stock shares. After informing several business associates and acquaintances about Edward Wayson's invitation to invest in Bancorp, those individuals purchased shares of Bancorp stock either individually or through investment partnerships with Paul Jones. Tr. 286 (Ear