Beware of certifications in that contract boilerplate

Infotech & the law | Legal insights for today's market

"The government takes representations and certifications seriously." Walter Zenner

The U.S. Court of Federal
Claims, which hears government contract
cases, awarded $435 million in
damages to a savings and loan several
years ago based on the government's
breach of its contract. Two months
ago, the court of appeals tossed out
the award, ruling that the S&L should
not get a single dollar ? all because of
a false certification buried in contract
boilerplate language.

How did that happen? And does it
offer any lessons for government
information technology
contractors?

The case of Long
Island Savings Bank,
FSB v. United States

is one of more than a
hundred that grew
out of the S&L crisis of the 1980s.
Because federal regulators lacked the
funds to shut down all the insolvent
S&Ls, they resorted to a strategy of
encouraging healthy S&Ls to take
them over. To overcome the deficits of
the insolvent S&Ls ? some of which
were hundreds of millions of dollars
underwater ? federal regulators
promised potential "white knights"
that it would allow them to use favorable
accounting treatment to help
restore their financial health.

In some instances, this rescue strategy
worked. But the S&L crisis persisted
and even grew worse as the
decade wore on.

When President George H.W. Bush
took office in 1989, Congress enacted
legislation that not only pulled the
plug on this strategy but also disallowed
the acquirers' continued use of
the promised accounting treatment.

Overnight, many S&Ls that had ridden
to the rescue of the federal government
found themselves in deep
trouble. Many of them sued the government
for breach of contract. One
of these was Long Island Savings
Bank. But its troubles were not just a
result of the government's sudden
course reversal.

When the bank acquired an insolvent
S&L in 1983, Long Island's chairman
and chief executive
officer executed
a contract that
included, in the fine
print, a certification
that Long Island
was in compliance
with applicable laws and had not misrepresented
any material facts to the
regulators. But as later came to light,
the CEO had not disclosed an impermissible
conflict of interest: He was
the principal owner of a law firm that
derived most of its revenues from
closing mortgage loans for Long
Island.

The CEO ultimately plead guilty to a
criminal misdemeanor, was disbarred
from the practice of law and was
required to pay more than $1 million
in restitution. But that was not the end
of it, at least not for Long Island.

In the breach lawsuit, the government
invoked a special anti-fraud
statute and argued that Long Island
should forfeit its claim because of the
false certification its CEO had signed
years earlier. The trial court rejected
this argument, finding that the government
had not proven the S&L
should be held responsible for the
CEO's actions. After a lengthy trial,
the court awarded the S&L $435 million
in damages.

When the appeals court overturned
the decision, it ruled that because
Long Island benefited from the
CEO's false certification, it was
responsible for it. Accordingly, the
S&L had to forfeit every last penny of
the $435 million.

Although relatively few government
contractors sue the government for
damages, this case nonetheless holds
lessons for all of them. Chiefly, the
government takes representations and
certifications seriously.

As one vintage judicial decision put
it, when dealing with the government,
one must "turn square corners." Good
words to live by, especially the next
time you're filling out a CSP-1 or
Section K.

Walter Zenner is a senior counsel in the
government contracts group at Pillsbury
Winthrop Shaw Pittman LLP in McLean, Va.
He can be reached at walter.zenner@pillsburylaw.
com.

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