Free Response - District Court of Federal Claims - federal

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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 RESPONSE TO PLAINTIFF'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 October 4, 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

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TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. BANCORP'S POST-TRIAL BRIEF FURTHER DEMONSTRATES THAT THERE IS NO CONTRACT BETWEEN BANCORP AND THE GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 BANCORP CANNOT DENY KNOWLEDGE OF THE IMPROPER SHAREHOLDER LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 BANCORP ERRONEOUSLY CONTENDS THAT THERE IS NO EVIDENCE THAT FSLIC RELIED UPON BANCORP'S REPRESENTATION THAT IT WOULD NOT ISSUE LOANS TO FUND ITS CONVERSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 BANCORP ERRS WHEN IT CLAIMS THAT THE REGULATIONS FORBIDDING AN INSTITUTION FROM FUNDING ITS OWN CONVERSION DO NOT APPLY TO HOLDING COMPANIES . . . . . . . . . . . . . . . 15 BANCORP'S BREACH WAS MATERIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 THE GOVERNMENT HAS NOT WAIVED ITS DEFENSE OF PRIOR MATERIAL BREACH OF CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. B. C. Bancorp Has Not Established Substantive Waiver . . . . . . . . . . . . . . . . . . . . . 23 Bancorp Has Not Established Procedural Waiver . . . . . . . . . . . . . . . . . . . . . . 30 Bancorp Has Failed To Establish Substantive Waiver As To Our Affirmative Defense Regarding Excess Investments In Service Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

II.

III.

IV.

V. VI.

VII.

THE DEFENSE OF FAILURE OF A CONDITION PRECEDENT . . . . . . . . . . . . . 37 A. Bancorp Has Failed To Demonstrate That The Government Waived This Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 The Evidence Has Established Failure Of A Condition Precedent . . . . . . . . . 40

B. VIII.

THE GOVERNMENT HAS NOT ALLEGED FRAUD . . . . . . . . . . . . . . . . . . . . . . . 42 i

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CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

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TABLE OF AUTHORITIES FEDERAL CASES Akin v. OTS, 950 F.2d 1180 (5th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 American Heritage Bancorp v. United States, 56 Fed. Cl. 596 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 39 Barren Island Marina, Inc. v. United States, 44 Fed. Cl. 252 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Barron Bankshares, Inc. v. United States, 366 F.3d 1360 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Browning Debenture Holders' Comm. v. DASA Corp., 560 F.2d 1078 (2d Cir. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Burton v. Northern Dutchess Hospital, 106 F.R.D. 477 (S.D.N.Y. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Caroline Hunt Trust Estate v. United States, 65 Fed. Cl. 271 (2005), appeals argued, Nos. 05-5141, -5179 (Fed. Cir. June 9, 2006) . . . . . . . . . . . . . . . . . . 14, 25, 30 Castle v. United States, 301 F.3d 1328 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Cherokee Nation v. United States, 355 F.2d 945 (Ct. Cl. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Christopher Village, L.P. v. United States, 360 F.3d 1319 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42, 43 Cities Service Helex, Inc. v. United States, 543 F.2d 1306 (Ct. Cl. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24 In re Conner Corp., 127 B. R. 775 (E.D. N.C. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4 D&N Bank v. United States, 331 F.3d 1374 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2

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Dow Chemical Co. v. United States, 226 F.3d 1334 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 26, 27 Eddy v. Virgin Islands Water and Power Auth., 256 F.3d 204 (3d Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Exxon Corp. v. United States, 931 F.2d 874 (Fed. Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 FDIC ex. rel. Karnes County Savs. & Loan Ass'n v. United States, 342 F.3d 1313 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Fifth Third Bank of Western Ohio v. United States, 55 Fed. Cl. 372 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 First Interstate Bank of Idaho v. Small Business Admin., 868 F.2d 340 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Matter of Garfinkle, 672 F.2d 1340 (11th Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 General Eng'g & Mach. Works v. O'Keefe, 991 F.2d 775 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Glass v. United States, 44 Fed. Cl. 73 (1999), rev'd in part, 258 F.3d 1349 (Fed. Cir.), amended on reh'g, 273 F.3d 1072 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Glass v. United States, 258 F.3d 1349 (Fed. Cir. 2001), amended on reh'g, 273 F.3d 1072 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 14 Groos Nat'l Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 H.N. Bailey & Assocs. v. United States, 196 Ct. Cl. 156 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Hometown Fin. Inc. v. United States, 409 F.3d 1360 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20

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Jamesbury Corp. v. Litton Indus. Products, Inc., 839 F.2d 1544 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Lewis v. United States, 70 F.3d 597 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2 Lincoln National Life Ins. Co. v. United States, 582 F.2d 579 (Ct. Cl. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24, 26 Mobil Oil Exploration and Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Pacific Gas & Elec. Co. v. United States, 70 Fed. Cl. 766 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 26 RTC v. Tetco, Inc., 758 F. Supp. 1159 (W.D. Tex. 1990), vacated as moot, 1992 WL 437650 (5th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Reliance Ins. Co. v. United States, 20 Cl. Ct. 715 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Reservation Ranch v. United States, 39 Fed. Cl. 696 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Scott Timber Co. v. United States, 64 Fed. Cl. 130 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Southern California Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 2967 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5, 7 Stone Forest Indus., Inc. v. United States, 973 F.2d 1548 (Fed. Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21 Suel v. Sec.'y of Health & Human Servs., 192 F.3d 981 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31 Sun Cal, Inc. v. United States, 21 Cl. Ct. 31 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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Tenneco Resins Inc. v. Reeves Bros., Inc., 752 F.2d 630 (Fed. Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320 (6th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 United States v. Winstar Corp., 518 U.S. 839 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 27, 34 Wagner Iron Works v. United States, 146 Ct. Cl. 334, 174 F. Supp. 956 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Wells Fargo Bank, N.A. v. United States, 33 Fed. Cl. 233 (1995), rev'd in part on other grounds, 88 F.3d 1012 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . 36 Wetsel-Oviatt Lumber Co. v. United States, 43 Fed. Cl. 748 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Williams v. Ashland Eng'g Co., 45 F.3d 588 (1st Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Zenith Radio Corp. v. Hazeltine Research Inc., 401 U.S. 321 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

STATUTES AND RULES 12 C.F.R. § 563b (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 17 12 C.F.R. § 563b.3 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12 C.F.R. § 563b.3(a) (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16 12 C.F.R. § 563b.3(c)(22) (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16, 18 12 C.F.R. § 563b.9 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 18 12 C.F.R. § 563b.20(c) (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16 RCFC 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 RCFC 15(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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MISCELLANEOUS 3 Moore's Federal Practice P 15.13(2) (2d ed. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Restatement (First) of Contracts § 275, cmt. a (1932) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Restatement (Second) of Contracts § 241, cmt. a (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Restatement (Second) of Contracts § 381(3) (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1278 (3d ed. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

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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 RESPONSE TO PLAINTIFF'S POST-TRIAL BRIEF Pursuant to the Court's orders dated August 8, 2006, and September 29, 2006, defendant, the United States, respectfully submits this response to the post-trial brief filed by plaintiff, First Annapolis Bancorp, Inc. ("Bancorp"). For the reasons stated in our opening brief and those stated below, the Court should enter judgment for the Government. ARGUMENT I. BANCORP'S POST-TRIAL BRIEF FURTHER DEMONSTRATES THAT THERE IS NO CONTRACT BETWEEN BANCORP AND THE GOVERNMENT As detailed in our previous filings and post-trial brief, Bancorp's breach of contract claim fails because there is no contract between Bancorp and the Government for goodwill and service corporation investment forbearances. See Parran Aff. (Jan. 22, 2003); Parran Dep. (May 14, 2003) at 73 (admitting that there was no agreement between the parties to count goodwill toward regulatory capital). The Court of Appeals for the Federal Circuit has repeatedly held that the elements necessary to determine that a contract exists are: (1) mutuality of intent to contract; (2) consideration; (3) lack of ambiguity in offer and acceptance; and (4) the Government representative whose conduct is relied upon had actual authority to bind the Government. D&N Bank v. United States, 331 F.3d 1374, 1378 (Fed. Cir. 2003) (citing Lewis v. United States, 70

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F.3d 597, 600 (Fed. Cir. 1995)). It is now clear that Bancorp cannot demonstrate these necessary elements. Although the parties proceeded to trial upon the Government's defense of prior material breach by assuming that Bancorp is a party to an enforceable contract, as evidenced at trial, there is no contract between Bancorp and the Government that would entitle it to the relief it seeks. Instead, Bancorp's post-trial brief and its ever-evolving definition of the alleged contract now demonstrate that Bancorp's breach of contract claim is based upon nothing but surmise and conjecture. See D&N, 331 F.3d at 1377 (rejecting alleged contract based upon a mere "cloud of evidence"). Throughout these proceedings, Bancorp alleged that the "contract" between it and the Government for regulatory forebearances for investments in service corporations and the amortization of goodwill consisted of the following: (1) the applications that Bancorp and First Federal Savings and Loan Association ("First Federal") concurrently filed with the Federal Home Loan Bank Board ("FHLBB") to approve First Federal's supervisory conversion and Bancorp's related acquisition of First Annapolis Savings Bank, FSB ("First Annapolis"); (2) a business plan submitted along with the application; (3) the Regulatory Maintenance/Dividend Agreement ("RCMA"); (4) various "forbearance" letters; (5) FHLBB resolutions 88-602 and 88-603; (6) various accountants' letters; and (7) a FHLBB letter dated February 9, 1989. See, e.g., Pl. Supp. Br. in Response to the Oct. 9, 2003 Order of This Court (Oct. 31, 2003) at 13 ("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."); see also e.g., Pl. Supp. Br. in Support of Its Mot. for Entry of J. on 2

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Liability (May 14, 2001) at 16-17; Pl. Reply to Def. Supp. Memo. & Opp. to Def. Cross-Mot. for Sum. J. on Liability (June 28, 2001) at 13; 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. Now, in a less than subtle effort to obviate Bancorp's explicit representation in its application for supervisory conversion that it would ensure that 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), Bancorp's post-trial brief contends that "the relevant terms of Bancorp's contract with the Government" can be found in: (1) the RCMA; (2) FHLBB Resolutions 88-602 and 88-603; and (3) a FHLBB letter dated February 9, 1989. Pl. Br. at 3-5; see also Tr. 852-54 (Pl. closing). If we take Bancorp at its word ­ ten years into this litigation ­ and assume that it has finally identified the components of its alleged contract, Bancorp's lawsuit must be dismissed. Of the documents identified by Bancorp to comprise the alleged contract, none contain the relevant goodwill and service corporation investments forbearances that are the subject of the lawsuit. Further, the RCMA, the only contract to which Bancorp conceivably is a party, was not breached by the Government, and certainly does not confer upon Bancorp standing to sue regarding the relevant forbearances. The United States Court of Appeals for the Federal Circuit makes clear that the RCMA, by itself, does not confer standing upon Bancorp to bring a breach of contract claim against the Government regarding the goodwill or service corporation forbearances.1 For example, in In fact, although it bears the title "agreement," the courts that have considered the issue of whether the RCMA, standing alone, could be enforced as a contract by the Government, have uniformly held that they were mere regulatory documents. See, e.g., FDIC v. Butler (In re 3
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Southern California Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 2967 (2006) ("SoCal"), discussed at length in our post-trial brief (p. 4-7), shareholders sought to recover for injuries they allegedly suffered when FIRREA limited their thrift's ability to use supervisory goodwill and capital credits. 422 F.3d at 1331. In the underlying transaction, a shareholders' holding company acquired a failed thrift, and the shareholder plaintiffs signed a RCMA by which they agreed to provide up to $5 million of additional capital should the need ever occur. The trial court in SoCal concluded that the shareholders were parties to an "overall" contract. Id. at 1332. It based this decision on several factors: (1) the shareholders were central to the transaction because without them the acquisition would never have occurred; (2) the shareholders initiated the acquisition process and negotiated directly with the Government; and (3) the Government knew that the shareholders would provide most of the money for the acquisition and would be the primary shareholders of the holding company making the acquisition. Id. at 1331-33. The Federal Circuit rejected the trial court's conclusion, holding: Contrary to the conclusion of the Court of Federal Claims, however, these roles of negotiator and shareholder do not bring the Individual Plaintiffs into privity of contract with the government in

Conner Corp.), 127 B. R. 775, 778-81 (E.D. N.C. 1991); RTC v. Tetco, Inc., 758 F. Supp. 1159, 1162-64 (W.D. Tex. 1990), vacated as moot, 1992 WL 437650 (5th Cir. Apr. 22, 1992); see also United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1331-33 (6th Cir. 1993) (Contie, J., concurring). Rather, RCMAs are administrative documents which Government agencies employ to achieve compliance with regulatory requirements. See Akin v. OTS, 950 F.2d 1180, 1183-84 (5th Cir. 1992) (citing Groos Nat'l Bank v. Comptroller of the Currency, 573 F.2d 889, 896 (5th Cir. 1978)). 4

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regards to the Assistance Agreement entered into with SCH and SoCal. Id. at 1331 ("The [trial] court's emphasis on the [shareholders'] involvement in the conversion and acquisition processes fails to acknowledge that a corporation is generally considered to be a separate legal entity from its shareholder . . . ."). Likewise, in FDIC ex. rel. Karnes County Savs. & Loan Ass'n v. United States, 342 F.3d 1313 (Fed. Cir. 2003), shareholders appealed dismissal of their claim that they contracted with the FHLBB when they used a newly chartered thrift to acquire a financially troubled institution. The failing thrift's chief executive officer negotiated the transaction. The Court noted that the shareholders "did not sign or draft any of the documents that reflected these arrangements." Id. at 1315. Indeed, the Court emphasized that the thrift's president wrote all the letters requesting permission to use "supervisory goodwill." Id. Rejecting the shareholder claims, the Federal Circuit stated: To be sure, the regulators undoubtedly were aware that the [shareholders] were supplying the money that would be used to rehabilitate [the thrift]. Neither that knowledge, the supplying of the new capital, or the [shareholders'] position as stockholders in [the thrift], made them parties to those arrangements. A shareholder generally does not have standing to assert a breach of contract claim on behalf of the corporation. Id. at 1319 (emphasis added) (citations omitted); see also First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1289 (Fed. Cir. 1999) ("Only Dollar entered into the Amended Agreement with the FDIC ­ not Dollar's shareholders. Thus, First Hartford and other similarly situated shareholders lacked privity of contract with the government.")

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Similarly in Glass v. United States, 44 Fed. Cl. 73, 79 (1999), rev'd in part, 258 F.3d 1349 (Fed. Cir.), amended, 273 F.3d 1072 (Fed. Cir. 2001), private shareholders initially owned Sentry Mortgage Corporation, which acquired a failing thrift called Security Savings Bank. The trial court determined that the shareholders were not direct parties to any contract, but were thirdparty beneficiaries. Id. at 79. In rejecting the shareholder's claims, the Court explained: Private plaintiffs, who are the four principal shareholders of Sentry, and who became the principal shareholders of Security, argue variously that they are parties to an express or implied-in-fact contract, or are third party beneficiaries. The documentary evidence shows, however, that individually the four private plaintiffs did not contract for the treatment of goodwill resulting from the acquisition; Sentry did. Sentry, of course, was subsumed as a result of the acquisition and the shareholders became controlling shareholders of Security. They are not parties to the contract. Id. On appeal, the Federal Circuit found that only Sentry and Security entered into an implied-in-fact contract with the FHLBB for certain regulatory treatment. Glass, 258 F.3d at 1355. The Federal Circuit stated "because the shareholders did not stand to directly benefit under the contract, they are at most incidental beneficiaries of the contract with no rights to enforce the contract against the United States." Id.; accord Castle v. United States, 301 F.3d 1328, 1339 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003) ("because the plaintiffs . . . neither negotiated with, nor promised any performance to, the government. Nor did the government make any alleged promises to these shareholders . . . these plaintiffs are at most incidental beneficiaries. As such, they lack standing to sue for breach of the alleged contract. Id.

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These authorities demonstrate that Bancorp, the sole shareholder of First Annapolis, does not have privity with First Annapolis and cannot recover for the Government's alleged breach of a goodwill contract merely by virtue of its participation in the RCMA. The RCMA, the only document to which Bancorp was a party (other than its own holding company application) contains none of the contractual promises that Bancorp claims the Government breached when Congress passed the Financial Institutions Reform Recovery, and Enforcement Act of 1989 ("FIRREA"). At most, the RCMA obligated Bancorp to maintain First Annapolis' regulatory capital at a specified level. Further, the RCMA did not contractually require Bancorp to make the initial capital contribution to First Annapolis and the Government did not require Bancorp to make any capital contribution pursuant to the terms of the RCMA. JX 99. Finally, even though Bancorp may consider itself as a "negotiator" with the Government regarding First Federal's supervisory conversion, this does not bring it into privity with the Government regarding some other contract between the Government and First Annapolis (the existence of which we dispute) containing the relevant goodwill and service corporation forbearances. SoCal, 422 F.3d at 1331. In attempting to retool the components of its alleged contract to avoid the prohibitions against shareholder loans, Bancorp has likewise precluded itself from any recovery in this case. Either the goodwill and service corporation forbearances and prohibition against using shareholder loans to fund the conversion apply to Bancorp or they do not. Despite Bancorp's attempt to dissect these concepts, they cannot be so easily separated. It is now clear that Bancorp is not a party to any contract with the Government regarding goodwill or service corporation forbearances. The only contract to which Bancorp arguably could be a party, the RCMA, was not breached by the Government. 7

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II.

BANCORP CANNOT DENY KNOWLEDGE OF THE IMPROPER SHAREHOLDER LOANS Bancorp's gamesmanship is also evident in its attempts to distance itself from the $3.975

million in loans to shareholders (DX 397 at WOT315 0147; Tr. 676-82 (Crompton)) by arguing that it had no knowledge of the impermissible loans because they were made by First Federal, not Bancorp. Pl. Br. at 17-18. In support of this argument, Bancorp cites the testimony of Douglas Parran, at all relevant times a director, executive vice-president, and president of Bancorp, First Annapolis, or First Federal, that he "was not aware of any loans made to those individuals to purchase stock." Tr. 403. Inexplicably, Bancorp even insinuates that because the Resolution Trust Corporation ("RTC") placed First Annapolis under receivership, the Government, not Bancorp, is somehow the actual party with knowledge of the impermissible loans. See, e.g, Pl. Br. at 7. These arguments are merely an attempt to cloud the real issues before the Court. Rather, the undisputed testimony and documentary evidence presented at trial demonstrate that Bancorp breached its alleged contract with the Government by permitting First Federal to fund its own conversion, made deliberate misrepresentations to the FHLBB, and knowingly accepted the proceeds of shareholder loans for the purchase Bancorp stock. Bancorp's statement that it did not have knowledge of loans to shareholders defies common sense. First, outside of serving as the holding company for First Annapolis, Bancorp conducted no separate business operations. As Bancorp stated in its May 13, 1988 amendment to its application for voluntary supervisory conversion "Bancorp [was] formed for the purpose of serving as a holding company for the savings bank. . . . [Bancorp] has no present plans to engage

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in any specific business operations or activities." JX 86 at WOT415 1119 (emphasis added). Further, in its private placement memorandum to potential investors, Bancorp represented that it was formed for the purpose of becoming a savings and loan holding company and acquiring [First Federal], in connection with [First Federal's] voluntary conversion and merger with and into a federal stock savings bank. . . . [Bancorp] has not yet engaged in any business and, immediately upon completion of the Conversion, its business will consist only of the business of [First Annapolis]. JX 89 at FA2006 0064 (emphasis added). Along these lines, Bancorp and First Federal (and later First Annapolis) shared common officers and directors. See, e.g., Tr. 315-16 (Parran); JX 89 at 109. For example, the amendment to Bancorp's and First Federal's applications for supervisory conversion states that both First Federal and Bancorp expected to confer upon Douglas Parran "substantially all of the responsibilities ordinarily associated with the office of President and Chief Executive Officer" after the conversion was complete. JX 86. This amendment was signed by Mr. Parran, both as Executive Vice President of Bancorp and as Executive Vice President of First Federal. Id. Further, in reviewing First Federal's and Bancorp's applications, the FHLBB noted that First Federal's current directors would continue to be members of the board of directors of both First Annapolis and Bancorp, and that Mr. Parran would become President of First Annapolis. DX 69 at WOQ273 0452 ("Mr. Parran will become president of First Federal when the conversion is consummated."). Finally, First Federal and Bancorp even conducted simultaneous board of directors meetings to discuss funding for "First Federal's voluntary conversion application." JX 25; see also JX 22 (First Federal board of director minutes discussing the conversion).

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Bancorp relies solely upon the testimony of Douglas Parran ­ testimony that begs credulity ­ to deny knowledge of the impermissible shareholder loans. It is well established that "a corporation can act only through its officers and agents, and when they are clothed with the authority to act for it, the corporation is responsible for their acts." Wagner Iron Works v. United States, 146 Ct. Cl. 334, 337-38, 174 F. Supp. 956, 958 (1959). This Court has recognized that an officer of a thrift is "clothed with the authority to act for it" when that officer is a high ranking official. Barren Island Marina, Inc. v. United States, 44 Fed. Cl. 252, 257 (1999). At trial, it was demonstrated through the testimony of the shareholders that Bancorp and Mr. Parran had knowledge of the impermissible loans. For example, despite the fact that they had no prior banking relationship with First Federal, Paul Jones' August 11, 1988 loan application for $125,000 and William Jones' August 12, 1988 loan application for $125,000 contain virtually no information regarding their assets or net worth. JX 110; JX 113. In fact, both applications vaguely list the purpose of the loans as "investment." JX 110; JX 113. Despite the absence of any information regarding their creditworthiness, the loan applications sailed through process and were approved, and the settlements occurred, on August 12, 1988, the day after Paul Jones submitted his application and the very same day that William Jones submitted his application. Moreover, at trial Paul Jones testified that he believed Mr. Parran was present when he signed his loan documentation. Tr. 229-30 ("Mr. Parran ­ Mr. Wayson brought in aides and agents in that thing and Mr. Parran may have been one of them, but I didn't know who he was at the time.") (emphasis added). Importantly, August 12, 1988 was the final day before the Bancorp conversion became effective on August 13, 1988. JX 119; JX 114.

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During this truncated loan process, both Paul Jones and William Jones failed to produce their tax returns at settlement as required by their loan commitment letters. Id.; Tr. 242-44 (P. Jones). As a result, after the conversion First Annapolis, though loan officer Catherine Hinkle, sent a letter to Paul Jones referencing the loans he received and requesting that he provide his tax returns for 1986 and 1987 for inclusion in the loan file. DX 180. Paul Jones responded to this request by providing the requested tax returns, not to the loan officer who had sent him the letter, but to Douglas Parran. DX 183 (addressed to "Dear Doug"). Additionally, the subject line of the letter from Paul Jones to Douglas Parran specifically referenced the purchase of "$275,000.00 shares of First Annapolis Bancorp common stock" rather than the loans totaling $275,000. Further, the body of the letter stated: "I am enclosing tax returns for 1986 and 1987 regarding the above-captioned purchase." Id. Given Paul Jones' re-direction of the letter to Douglas Parran, the first-name salutation, and the subject line referencing the Bancorp stock purchase, the only reasonable inference that can be drawn is that Paul Jones and Douglas Parran were aware of the loan/stock purchase arrangement. The logical conclusion from these documents and the rushed manner in which these loans were approved ­ only hours before the Bancorp conversion ­ is that Douglas Parran knew that the purpose of the loans was to purchase Bancorp stock. Paul Jones and William Jones were not the only shareholders that applied for loans from First Federal on the eve of the conversion on August 13, 1988. In August 1988, First Federal's Management Committee approved a $1 million commercial loan to Rental Management Associates ("RMA") made subject to the personal guarantee of each RMA partner. JX 76; Joint Fact. Stip. 11. On August 10, 1988, the RMA partners signed a $1 million commercial promissory note payable to First Federal which resulted in each RMA partner owning 250,000 11

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shares of Bancorp stock as of August 12, 1988 (the day before the Bancorp conversion), 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. Like Paul Jones and William Jones, despite their $1 million loan, RMA and its four partners had no prior banking relationship with First Federal and provided little, if any, documentation of the creditworthiness to First Federal when applying for their loan. Tr. 486 (Horrigan). On August 12, 1988, Paul Jones also obtained second loan from First Federal in the amount of $150,000 for the purchase of an additional 150,00 shares of Bancorp stock. JX 121; Joint Fact Stip. 21. This second loan was the result of Paul Jones's business associates ­ Broughton Earnest, James Earnest, and David Thompson ­ purchasing shares of Bancorp stock through investment partnerships with Paul Jones. Tr. 286 (Earnest); Tr. 424 (W. Jones); Tr. 22728 (P. Jones). Another business associate of Paul Jones, Roy Cowdrey, also received a $50,000 loan from First Federal for the purchase of 50,000 shares of Bancorp stock on or about August 12, 1988. Tr. 156-57, 162-64 (Cowdrey) (recalling that the loan paperwork was approved and signed in "kind of a hurry-up fashion" on August 12, 1988); JX 76; JX 112; JX 114; JX 115. Further, on August 12, 1988, First Federal approved a $150,000 loan to Dr. Arthur Schwartz and issued a check in the amount of $150,000 to him that same day. JX 103; Schwartz Dep. at 10; DX 171. Despite Dr. Schwartz's failing memory, Paul Jones testified that Dr. Schwartz's purchase of 150,000 shares of Bancorp stock was funded by the $150,000 loan he received from First Federal on August 12, 1988. Tr. 227-28 (P. Jones). The evidence at trial established that no cash was exchanged in conjunction with these hastily arranged shareholder loans that were applied for, approved, and settled within one or two 12

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days of the deadline for First Federal's conversion. Tr. 156, 160 (Cowdrey); Tr. 246-47 (P. Jones); Tr. 286-87 (Earnest); Tr. 441-42 (W. Jones). Rather, the loan proceeds from each First Federal loan were directly credited to the purchase of each shareholder's Bancorp stock in a noncash transaction. Thompson Dep. at 16; Tr. 156-57 (Cowdrey); Tr. 247-48 (P. Jones); Tr. 442-43 (W. Jones). As Mr. Zimmerman succinctly put it, Bancorp was "using its own money to fund its own conversion" by "just changing bank drawers that it's kept in." Tr. 49, 62 (Zimmerman). Given these circumstances, it is inconceivable that Douglas Parran, and therefore Bancorp, did not know that loans were being made by First Federal to shareholders to fund the conversion. Indeed, on August 12, 1988, when Mr. Parran personally approved hundreds of thousands of dollars in loans on behalf of First Federal to shareholders like the partners of RMA, Paul Jones, and William Jones, and others, he also signed the RCMA on behalf of Bancorp. Tr. 347-50, 377-78 (Parran). To borrow an analogy from Bancorp's counsel, Bancorp's denials of knowledge of the shareholder loans are reminiscent of "the French police captain in Casablanca who said, [`]Rick, I'm shocked, shocked to hear that gambling was going on in there, and puts money in his pocket.[']" Tr. 684. Unlike the fictional police captain, Bancorp should not be permitted to benefit from the admittedly improper shareholder loans by relying upon such absurd doublespeak in an obvious effort to circumvent the regulations. See Tr. 43-44, 62 (Zimmerman) (explaining that the entire purpose of a conversions to bring in "new, unfettered capital"); Tr. 572-73 (G. Jones).

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III.

BANCORP ERRONEOUSLY CONTENDS THAT THERE IS NO EVIDENCE THAT FSLIC RELIED UPON BANCORP'S REPRESENTATION THAT IT WOULD NOT ISSUE LOANS TO FUND ITS CONVERSION Equally absurd is Bancorp's contention that the Government failed to present evidence

that the "FSLIC relied on the statement in paragraph X" of Bancorp's application for supervisory conversion that it would not "loan funds or otherwise extend credit to any person to purchase shares of [Bancorp] Stock offered in the Conversion" because "the Government did not call a witness from FSLIC." Pl. Br. at 13; see also JX 87 at WOT415 0499). Bancorp's contention represents a flawed understanding of the federal regulation of the thrift industry. Prior to passage of FIRREA, the FHLBB was the operating head of FSLIC and accordingly approved acquisitions, mergers, and other transactions between thrifts. United States v. Winstar Corp., 518 U.S. 839, 844 (1996); see also Glass v. United States, 258 F.3d 1349, 1351 n. 1 (Fed. Cir. 2001) ("The FSLIC was an agency under the FHLBB that formerly insured thrift deposits and acted to regulate all federally insured thrifts."); Caroline Hunt Trust Estate v. United States, 65 Fed. Cl. 271, 273 (2005) (FHLBB "served as the operating head of the FSLIC, and the FSLIC conducted its operations as a division or office within the FHLBB"). Here, the Government offered the testimony of Park Zimmerman, the Executive Vice President of the Federal Home Loan Bank of Atlanta ("FHLBB-Atlanta"), the "operating head" of FSLIC in Atlanta in August 1988. Tr. 38-39, 41. Mr. Zimmerman was in charge of the entire examination and supervisory side of the FHLBB-Atlanta. Tr. 39-40, 42. He explained that when reviewing a supervisory conversion applications, part of his responsibilities was to make sure the applicant complied with the FHLBB's and FSLIC's rules and regulations governing supervisory conversions, including those prohibiting the use of shareholder loans to fund the conversion. Tr. 14

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46-48. Additionally, Mr. Zimmerman testified to the importance of an applicant's representation that it would not fund its own conversion through shareholder loans when he stated, without qualification, that, if an applicant was loaning funds to purchase stock as part of its supervisory conversion, and he was aware of that fact at the time the loans were being made, the FHLBBAtlanta "would have taken action to stop the conversion at that point." Tr. 55. According to Mr. Zimmerman, this would have been considered a "fatal violation that would cause the approval to be withdrawn . . . if it had already been granted at that point." Id. In short, the Government provided a representative of FSLIC who testified not only that the Government relied upon the thrift's representation that it would not fund its own conversion, but that this went to the very heart of the Government's approval. See Tr. 43-44 (Zimmerman); see also Tr. 572-73 (G. Jones). Therefore, Bancorp's assertion that the Government failed to show that FSLIC relied upon Bancorp's representation that it would not issue loans to fund its own conversion is erroneous. IV. BANCORP ERRS WHEN IT CLAIMS THAT THE REGULATIONS FORBIDDING AN INSTITUTION FROM FUNDING ITS OWN CONVERSION DO NOT APPLY TO HOLDING COMPANIES As we argued at trial and in our post-trial brief, the regulations, as well as the understanding of the parties at the time, and the documents that Bancorp claims to constitute its contract, require Bancorp to do more than simply make an empty promise that it would not fund its own conversion through shareholder loans. Indeed, it required Bancorp to actually ensure that no such self-funding would take place. Now, in an effort to avoid these requirements, Bancorp first argues that the relevant regulations do not apply to it because it is a "holding company." Pl. Br. at 16-17; see 12 C.F.R. §§ 563b.20(c), 563b.3(a), 563b.3(c)(22) (1988). Bancorp then argues 15

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that even if these regulations apply to holding companies, it complied with the regulations merely by including a provision in the plan of conversion that First Federal would not loan funds "to anyone to purchase stock in the converting institution." Pl. Br. at 16. If Bancorp's paradoxical arguments are correct, one must ask why the regulations governing supervisory conversions were adopted in the first place, since they could be so easily avoided by the expedient of a holding company. But see Tr. 43-44 (Zimmerman). As we demonstrated at trial, at the time of the conversion, the FHLBB's regulations governing the conversions of thrifts from mutual to stock form were found at 12 C.F.R. § 563b. Subpart C to Part 563b, which governed voluntary supervisory stock conversions, provided that "[a]ll of the provisions of Subpart A of this part shall apply to a supervisory conversion undertaken pursuant to this subpart unless clearly inapplicable." 12 C.F.R. § 563b.20(c). Further, subpart A of Part 563b ­ and, in particular, 12 C.F.R. § 563b.3 ­ provided general principles for conversions, and confirmed that the "provisions of this subpart shall govern conversions undertaken pursuant to any other subpart of this part unless clearly inapplicable." 12 C.F.R. § 563b.3(a). Section 563b.3 details the numerous requirements for a plan of conversion, including the condition that "the converting institution shall not loan funds or otherwise extend credit to any person to purchase the capital stock of the institution." 12 C.F. R. § 563b.3(c)(22). Likewise, subpart A encompasses 12 C.F.R. § 563b.9, which applies to the conversion of an insured institution in connection with the formation of a holding company and states, among other things, that, "[u]nless clearly inapplicable, all of the requirements of this Subpart A shall apply to a conversion under this section." Id. (emphasis added).

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Bancorp's argument that these regulations to do not apply to it belies both the plain language of the regulations and the evidence in this case. For example, throughout its internal deliberations regarding First Federal's supervisory conversion and Bancorp's acquisition of First Federal, the FHLBB analyzed First Federal's and Bancorp's applications under the rules and regulations governing supervisory conversions contained in subpart C (and, by necessary implication, subpart A) of 12 C.F.R. § 563b. See Tr. 46-62 (Zimmerman). This is specifically recognized in the FHLBB resolutions, numbers 88-602 and 88-603, which were issued in connection with the FHLBB's approval of First Federal's and Bancorp's applications on July 21, 1988. DX 69; JX 92; JX 93. Indeed, on February 18, 1988, the Supervisory Agent in charge of First Federal at the FHLBB-Atlanta recommended the approval of First Federal's and Bancorp's applications, subject to Bancorp filing, within thirty days from the date of the acquisition, a certification by legal counsel that, among other things, the acquisition had been consummated in accordance with all applicable laws and regulations, the application, and the FHLBB resolutions issued in connection with the approval. DX 69 at WOQ273 0454-55. Another condition of approval was that Bancorp and First Annapolis satisfy "all requirements and conditions imposed by the [FHLBB], and comply with all applicable laws, rules and regulations." Id. at WOQ273 0455. Moreover, Bancorp and First Annapolis' special counsel represented that the "Conversion of [First Federal], the merger of the Association with and into [First Annapolis] and the acquisition by [Bancorp] of all of the issued and outstanding shares of Capital Stock will have each been completed in compliance with the Approval, all applicable laws regulations administered by the [FHLBB] and [FSLIC] . . . ." DX 224 at PFA010 1644 (letter to the FHLBB 17

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dated Oct. 14, 1988 from Bancorp's and First Annapolis' special counsel); see also Tr. 82-83 (Zimmerman). Likewise, Bancorp's supervisory conversion application obligated it to comply, with any applicable FHLBB and FSLIC rules and regulations regarding supervisory conversions. JX 83 at WOT520 0127 (supervisory conversion application). In turn, relying upon the representations of Bancorp, the FHLBB "confirm[ed] that all the conditions precedent [had] been met" and the effective date of the conversion was August 13, 1988." JX 101; Tr. 600-02 (G. Jones); see also DX 287. The plain terms of the documents that Bancorp says form its alleged contract 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. Thus, Bancorp's argument that the regulations do not apply to it as a "holding company" is without merit. The regulations specifically applied to holding companies formed in connection with a supervisory conversion, unless clearly inapplicable. 12 C.F. R. §§ 563b.3(c)(22) & 563b.9. 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). Bancorp also understood this to be the case at the time of the conversion, otherwise, why did it specifically represent in its application for the supervisory conversion that First Federal will not loan funds to individuals to buy Bancorp stock. Compare JX 87 at WOT415 0499 with 12 C.F.R. § 563b.3(c)(22). Further, Bancorp's argument that, even if the regulations apply to holding companies, it complied by stating in its plan of conversion that improper shareholder loans would not be made, is nonsensical. Or, to borrow a phrase from Bancorp's counsel ­ "that dog still won't hunt." Tr. 17. Obviously, if Bancorp could comply with the regulations merely by representing that it 18

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would not use loans to shareholders to fund its own conversion, but in turn used the shareholder loans to finance First Federal's supervisory conversion, one of the most important regulations governing a supervisory conversion would be rendered meaningless. But see Tr. 346-47 (Parran) (recognizing that it was a violation of the regulations to issue loans to individuals to purchase stock in the conversion). Moreover, if Bancorp's position is accepted, it would not only reduce the regulations to empty words, but thrifts could avoid complying with the regulations simply by creating a holding company. V. BANCORP'S BREACH WAS MATERIAL The evidence introduced at trial demonstrated that Bancorp's breach was material. To begin, Bancorp concedes, as it must, that the evidence showed that it was a "matter of vital importance or the essence of the conversion [] to get new capital." Pl.'s Br. at 19. (emphasis added); see Hometown Fin., Inc. v. United State, 409 F.3d 1360, 1370 (Fed. Cir. 2005) (a material breach "relates to a matter of vital importance" and "goes to the essence of the contract."). However, Bancorp argues that its violation of the regulation prohibiting loans to shareholders was not a material breach because it complied with another term of the FHLBB Resolution 88-603, which required it to invest at least $11 million in new capital into the thrift. Id. Bancorp invested $13,665,907 into First Annapolis, or $2,665,907 more than the FHLBB Resolution 88-603 required. Id. at 19-21. Because this "surplus" of $2,665,907 exceeded the $1,600,000 in shareholder loans to RMA, Paul Jones, William Jones, Cowdrey and Schwarz by $1,065,907, Bancorp claims that there can be no material breach of the contract. Id. at 20-21. Bancorp is wrong for several reasons. First, there was not an "over investment" of $1,065,907 because the Government proved through a preponderance of the evidence that there 19

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were $3,975,000 in shareholder loans violating the regulations, so Bancorp did not meet the FHLBB Resolution requirement to invest at least $11 million. DX 397 at WOT315 0147; Tr. 676-82 (Crompton). Second, whether this "over investment" was $1,065,907 or $1, the breach is still material. Even if the Court found that, after deducting the amount of shareholder loans, Bancorp invested the required $11 million in real capital, the breach would still be material based upon the evidence introduced at trial "in light of the totality of events and circumstances." See Stone Forest Indus., Inc. v. United States, 973 F.2d 1548, 1552 (Fed. Cir. 1992) (citing Restatement (Second) of Contracts §241, cmt. a (1981)).2 The regulators provided testimony regarding "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 Industries, Inc., 973 F.2d at 1551. More specifically, they testified that had they known about the shareholder loans at the time they were being made, they would have acted immediately to stop the conversion. Tr. 55 (Zimmerman); Tr. 578, 603 (G. Jones). The breach is clearly "material" because the very purpose of the alleged contract was to gain regulatory approval for the supervisory conversion and acquisition of First Federal by Bancorp. The testimony indicated that the regulatory approval would have been withdrawn because of the shareholder loans. Hometown, 409 F.3d at 1370.

Bancorp's argument has improperly oversimplified the issue of material breach to a matter of compliance with this $11 million minimum capital requirement in the FHLBB Resolution. In Bancorp's view, they must have breached this requirement in order for their violation of the regulation to be material. This is not correct. Even if Bancorp met this requirement, the Government has proved that the shareholder loans represented a "material" breach. 20

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Mr. Zimmerman testified that "it didn't really matter how much was involved" because it was still a regulatory violation. Tr. 122. Nevertheless, should the Court consider the dollar amount of shareholder loans, the breach is still material. The Government has proven $3.975 million in shareholder loans, which represented 28.1 percent of the stock issued. DX 397 at WOT315 0147; Tr. 676-82 (Crompton). Even if the Court were to consider only the $1.6 million in shareholder loans, conceded by Bancorp, those loans still represent a 11.29 percent of the total shares sold by Bancorp, which by its own admission, is a "relatively significant number." Tr. 338 (Parran); see Stone Forest Indus., Inc., 973 F.2d 1548 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"). Bancorp further argues that the breach is not material because the evidence indicates that the Government did not view the shareholder loans as a significant matter in January 1990. Pl. Br. at 21. However, Bancorp's only evidence to support its contention, the cross-examination testimony of Greg Jones (Tr. 635), does not support Bancorp's contention. Greg Jones did not testify that shareholder loans were not a significant supervisory issue. Rather, Mr. Jones testified that, although the loans to shareholders were indeed significant, Bancorp's other supervisory issues were more significant at that time. Tr. 635 ("We were addressing a number of other problems at the institution at that time that had direct bearing on the instituion's solvency, and this issue was at that point in time not as significant . . . . This issue at that time was not as relevant as these solvency issues that were present.") (emphasis added); see also DX 438. 21

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In any event, the evidence admitted at trial established that the regulators considered the shareholder loans to be a significant supervisory concern that the thrift had to address. DX 397; DX 439. Mr. Crompton documented this supervisory issue in his January 1990 examination. DX 397 at WOT315 0147; Tr. 674-77 (Crompton). Furthermore, by letter dated April 18, 1990, the OTS formally notified First Annapolis of the major supervisory concerns that were revealed during the examination, including the impermissible loans to shareholders. DX 439. The OTS directed First Annapolis to "remove all loans to stockholders, the purpose of which were to purchase stock in the Institution, from the Institution's books without material loss and without reciprocal lending arrangements with other financial institutions." DX 439; Tr. 605 (G. Jones). Despite the well-settled law on prior material breach, Bancorp continues to press the argument that any actual loss to the Government from the shareholder loans was "de minimis." Pl. Br. at 21-22. Indeed, the actual losses associated with these loans is not determinative of the issue of materiality. See Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 620-21 (2000) (materiality does not depend upon whether the breach results in a financial loss to the non-breaching party). In any event, Bancorp has again misconstrued the testimony presented at trial regarding the actual loss to the Government. For example, the evidence at trial did not establish that the loan to RMA was paid back in full. Mr. Taylor's testimony that, over fifteen years later, he was sure that the loan was paid back simply because the liens were released by Second National does not prove that there was no loss. Tr. 543. In fact, he did not remember RMA making any payments on the loan and was not involved with that aspect of the business. Id. Moreover, his partners in RMA, Messrs. Howard and Horrigan testified that they had no recollection of any 22

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payments being made on the $1 million RMA loan. Tr. 416 (Howard); Tr. 492, 499, 500 (Horrigan). Furthermore, each RMA partner, including Mr. Taylor, declared bankruptcy after defaulting on this obligation. Tr. 416 (Howard); Tr. 498-99 (Horrigan); Tr. 552-55 (Taylor). The evidence established that most of the shareholder loans resulted in some loss. Tr. 266-67, 269-70 (P. Jones); Tr. 170-76, 177 (Cowdrey); Tr. 478 (W. Jones); DX 536; DX 613; DX 614; DX 619, DX622. However, regardless of the exact amount of loss demonstrated at trial, these shareholder loans were still a material breach. VI. THE GOVERNMENT HAS NOT WAIVED ITS DEFENSE OF PRIOR MATERIAL BREACH OF CONTRACT Despite Bancorp's arguments to the contrary, the Government never waived its prior material breach defense, either as a matter of substance or procedure. A. Bancorp Has Not Established Substantive Waiver

Bancorp argues that the Government substantively waived its prior material breach defense during the course of its dealings. Pl. Br. 22-30. First, Bancorp's statement of the law concerning the election doctrine is incomplete. Bancorp implies that if after discovering a material breach, the non-breaching party continues to perform the contract, that continuing performance always constitutes a waiver of its defense. Id. at 23 (citing Cities Service Helix, Inc. v. United States, 543 F.2d 1306, 1313 (Ct. Cl. 1976)). To the contrary, the Federal Circuit has held on numerous occasions that a party's continued performance did not waive this defense. McDonnell Douglas Corp. v. United States, 182 F.3d 1319, 1326 (Fed. Cir. 1999) (citation omitted) ("A party that chooses to proceed with the contract ­ even if it is the government, and even if it manifests a strong desire to procure the item that is the subject of the contract ­ does

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not thereby waive its right to terminate for default."); Dow Chemical Co. v. United States, 226 F.3d 1334, 1346 (Fed. Cir. 2000) (finding no waiver of termination right where there was no evidence that the breaching party was prejudiced by the non-breaching party's delay in terminating); see also Pacific Gas & Elec. Co. v. United States, 70 Fed. Cl. 766, 771-72 (2006) (relying upon Dow in rejecting the argument that plaintiff waived claim for material breach under "election doctrine").3 Even assuming for the sake of argument that continued performance always waives the breach, the Government's conduct did not meet this standard because it seized the thrift on May 31, 1990 ­ less than 50 days after informing the thrift of the breach on April 18, 1990. Therefore, this case is clearly distinguishable from Barron Banchshares, Inc. v. United States, where the Court found the defendant waived the prior material breach, because it acted inconsistently with the "perceived material breach," by continuing to perform for years. 366 F.3d 1360, 1383 (Fed. Cir. 2004) ("On the one hand, the government claims that investor plaintiffs almost immediately implemented a practice of reckless lending, yet on the other, it nevertheless continued to make its assistance payments for the full five years.") (citations omitted). In this

Indeed, in Cities Service Helix, the very case cited by Bancorp, the trial court acknowledged that there are four approaches to determining whether a party's continuing performance waives their defense. 543 F.2d at 1313-14. The least strict view was Professor Corbin's "that an election to continue performance should not be conclusive unless facts giving rise to an estoppel exist; either the breaching party must have changed his position in reliance on the injured party's failure to cancel or the injured party's conduct must be such that it would be unjust to allow him to change his position." Id. The trial court found that the party had waived its defense under all of these four theories. Id. at 1314. Bancorp has failed to provide any evidence that it relied on the Government's purported failure to cancel or that the Government should be estopped from raising this defense. 24

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case, the Government did not act inconsistently with the breach, and therefore, has not waived it as a defense.4 Bancorp also argues that the Government waived the breach because it did not comply with Section V of the RCMA, in that we did not send a formal "notice of default" under the contract but instead treated the matter as a regulatory violation. Pl. Br. at 24-25. This argument fails for several reasons. First, Bancorp's argument fails to give effect to the entire language of Section V. Section V. B. of the RCMA states that "[n]o failure or delay on the part of the FSLIC in the exercise of any right or remedy shall operate as a waiver thereof, nor shall any partial exercise of any right or remedy preclude other or further exercise of any other right or remedy." JX 99. In other words, the parties agreed that the Government's conduct alone could not serve to waive any default under the RCMA. Moreover, Section V. C. of the RCMA requires that any waiver by the Government be in writing. JX 99. Because the Government never waived any default based upon the shareholder loans in writing, Bancorp has failed carry its burden of proving a voluntary and intentional waiver on the part of the Government. See Reliance Ins. Co. v. United States, 20 Cl. Ct. 715, 723 (1990); Cherokee Nation v. United States, 355 F.2d 945, 950 (Ct. Cl. 1966). Second, the Government's April 18, 1990 letter was sufficient "notice of default" under Section V. In its April 18, 1990 letter, the Government informed Bancorp in writing that these shareholder loans were improper and instructed it to remove them from the institution's books.
4

Caroline Hunt can be distinguished on the same basis. In that case, the Court, relying upon Barron Bancshares as "determinative," found waiver because the Government continued to make payments under the assistance agreement while the breaching activity was taking place. 65 Fed. Cl. 271, 309-10 (2005). This ruling was mere dicta because the Court found, in any event, that the defendant had not established a prior material breach. 25

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DX 439. Nothing more was required by Section V of the RCMA than formal written notice. The RCMA did not explicitly require the regulators to use the terms "notice" or "default." Therefore, this conduct cannot represent waiver of the breach.5 Third, Bancorp asks the Court to ignore the reality of the situation and the full context provided by the evidence at trial. The Government's treatment of the matter as a "regulatory violation" in no way precludes its assertion of a prior material breach defense. Furthermore, the witnesses' characterization of the problem as "regulatory" or of "supervisory concern" is irrelevant for purposes of the legal determination of the issue of waiver. At the time, the Government viewed the supervisory conversion from a regulatory standpoint rather than a contractual one. In most instances Government regulators are not attorneys and certainly did not view the regulations as terms of a "contract" with the thrifts they regulated. Indeed, Greg Jones testified that, like the regulatory prohibition against a thrift funding its own conversion through loans to

Bancorp interprets the Government's April 18, 1990 letter to the thrift instructing it to remove the loans to shareholders from its books as "sufficient evidence of waiver" based u