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44 Procurement Law. 1 (2008-2009)

handle is hein.journals/procurlw44 and id is 1 raw text is: The Strange Case of Long Island Savings Bank- Or How a Contract Self-Destructed into Voidness BY JOHN S. PACHTER This article will discuss and analyze the opinion of the United States Court of Ap- peals for the Federal Circuit in Lo g Isla Savings Bank, FSB v. United States, 503 E3d 1234 (Fed. Cir. 2007), reh'g and reh'g en banc denied, 2007 U.S. App. LEXIS 30345 (2007), petition for cert. filed, No. 07-1234 (U.S. Mar. 27, 2008). In an unprecedented decision, the Federal Circuit sua sponte declared void a fully performed contract from which the government had obtained substantial benefit The court issued this decision in the face of clear evidence that: (a) the fraud was committed without the knowledge or con- sent of the contractor; (b) the government's material breach of contract preceded the contractor's discovery of the fraudulent activity; (c) the contractor acted in good faith to rectify the fraud once it was discovered; and (d) the fraud did not result in hann to the government. This decision not only departs substantially from the law re- garding fraud in the formation of a contract, but also gives the Department of Justice a powerful tool to defeat legitimate claims by searching for erroneous certifications to use as the basis for a fraud assertion. This Winstar' case involves the misdeeds of a single in- John S. Pachter is a partner in Smith Pachter McWhorter PLC, Vienna, Virginia. This article is adapted from a presentation on January 9, 2008, to the Contract Claims and Disputes Resoutua Committee of the Sec- tion of Public Contract Law of the American Bar Association. The author acknowledges the assistance of Kathryn T. Muldoon, associate attorney at Smith Pachter McWhorter, in the preparation of this article. dividual, James J. Conway, Jr., chairman and CEO of the Long Island Savings Bank (LISB). Conway, as we shall see, was a resourceful person, but not in a helpful way. In 1983, the Federal Savings and Loan Insurance Cor- poration (FSLIC) solicited bids for the takeover of a failed thrift. Of the six bids received, LISB's bid was most favorable. LISB proposed the least amount of financial as- sistance from FSLIC, which was attracted by LISB's proven record of sound financial management. LISB acquired the failed thrift, received an infusion of $122 million from FSLIC, and entered into an assistance agree- ment that subjected the thrift's officers and directors to federal restrictions and imposed federal guidelines and regulations on the new thrift. The assistance agreement provided that, as a result of the acquisition of the failed thrift, LISB acquired supervi- sory capital. The agreement further provided that LISB could treat the supervisory capital as regulatory capital and (continued on page 22) 7 I -,, - -.< _ 1 '- , . I -

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