Ruling on Illinois S&L; Could Disrupt Bailout Plan : Regulation: The decision, which challenges actions by the Office of Thrift Supervision, invites similar suits.

A federal judge ruled Wednesday that federal regulators lack constitutional authority to seize an ailing Illinois savings and loan, throwing into disarray the nation’s already troubled thrift bailout program.

U.S. District Judge Royce C. Lamberth in Washington agreed with Olympic Federal Savings & Loan of Berwyn, Ill., that the 7-month-old U.S. Office of Thrift Supervision lacks authority to seize the thrift because its previous director, M. Danny Wall, and its current one, Salvatore R. Martoche, were improperly named to their posts.

Legal experts said the ruling only temporarily bars the government from seizing the suburban Chicago institution and is not expected to unravel the seizure of any of the more than 350 S&Ls; operating under government supervision. They added that it also does not take away the government’s basic right to seize insolvent institutions.

But it does add confusion, delays and ultimately higher costs to the nation’s bailout fiasco because other already seized thrifts or those expecting to be seized may sue on similar grounds.

Already by late Wednesday, at least one such suit had been filed. San Diego-based Imperial Corp. of America, former parent of Imperial Savings Assn., said it filed a lawsuit in federal court in San Diego seeking a restraining order and preliminary injunction to overturn the Feb. 23 seizure of Imperial Savings as unconstitutional. Imperial Corp. of America, which filed for bankruptcy protection on Feb. 28 following the seizure of its thrift unit, cited Lamberth’s ruling as grounds for its claim.

Such legal challenges, if successful in delaying or overturning seizures, could add to estimates that the bailout will cost taxpayers $285 billion over 30 years--roughly $1,100 for every man, woman and child in the nation. Any more delays could cost millions, even billions, of dollars if regulators find their hands tied by the decision.

“What the court is saying is that nobody at the agency is in a position to be a decision maker. That’s hard to understand,” said Eugene M. Katz, acting chief counsel for the agency.

Katz said government lawyers will ask an appeals court judge today to stay Lamberth’s order and will request an immediate hearing to appeal the case. Lamberth declined late Wednesday an OTS request to suspend his order.

Olympic’s basic argument was that Wall lacked legal authority as head of the Office of Thrift Supervision because he was never confirmed by the Senate. Wall had been chairman of the Federal Home Loan Bank Board and continued as the chief regulator for S&Ls; when the bank board was replaced by the OTS as part of last year’s S&L; rescue legislation.

Lamberth said Wall “required re-nomination and re-confirmation before he could constitutionally take office as OTS director.” He added that because Wall “was never re-nominated or re-confirmed, he never constitutionally took office.”

Wall left the job earlier this month amid criticism that he mishandled the case involving the scandal-plagued Lincoln Savings & Loan in Irvine. Wall was replaced by acting OTS director Salvatore R. Martoche, and President Bush has since nominated a permanent successor, Washington lawyer T. Timothy Ryan, who must be confirmed by the Senate.

Lamberth ruled that Martoche’s temporary appointment by President Bush under legislation to fill federal job vacancies is also improper because Martoche is replacing someone who wasn’t properly confirmed. If this procedure were permitted, “the President could unconstitutionally ‘appoint’ an ‘officer,’ have him resign and then use the vacancies act to fill the post for up to 120 days,” Lamberth said.

Lamberth tempered his ruling by noting that he was not “closing the door on the OTS” and also not invalidating actions taken by Wall or Martoche. “Olympic has not asked this court to issue a sweeping injunction prohibiting the director (of OTS) from taking any action against any S&L;,” Lamberth said.

But he acknowledged the ruling could have a major affect on the agency, which he said was secondary to the Constitutional issue.

“Although this may lead to a great deal of litigation and place OTS operations in some confusion, the clear violation of (Olympic’s) constitutional rights and the public’s interest in protecting the Constitution outweigh these harms to the public interest,” Lamberth wrote.

Olympic was solvent under the old thrift rules but insolvent under new laws that went into effect last year. Those laws wiped out an intangible asset called goodwill. Thrifts such as Olympic could claim on their books that goodwill was capital, which is the financial cushion a thrift must maintain against losses.

In an interview, Olympic Chief Executive John J. Lanigan said the thrift sued because “word on the street” was that it was to be seized any day after regulators in February turned down the thrift’s business plan to restore its capital.

He said Olympic had an investor lined up willing to put money into the thrift and the investor would have walked away from the deal if regulators seized Olympic. At that point, he said, Olympic decided to challenge the OTS using the novel argument that Wall’s appointment was invalid.

“The law had quite a few Constitutional flaws. We happened to detect a few and the judge happened to agree with us,” Lanigan said.

In a telephone interview from his home in Virginia, Wall called Lamberth’s ruling bizarre and said it hurts efforts to clean up the thrift problem.

“Anything that delays costs more money,” Wall said. “The irony is that it is the taxpayer that is funding this litigation because it is an insolvent institution.”

But most lawyers predicted that the OTS would probably prevail in challenging Lamberth’s ruling.

“There is so much to be lost and nothing to be gained by that kind of position. It’s hard to see a court that will take such a technical position even though this judge did,” said Norman H. Raiden, a Coast Savings executive vice president in Los Angeles who formerly was the top lawyer at the Bank Board.

Some also predicted that the ruling could prompt a speedy confirmation of Ryan, who could then affirm the actions of Wall and Martoche. Lamberth’s ruling, after all, specified that Martoche or any other OTS official cannot appoint a conservator for Olympic until a new director is “constitutionally appointed.”

Paul H. Irving, a thrift lawyer at the Manatt, Phelps, Rothenberg & Phillips law firm in Los Angeles, said regulators still maintain the power to put thrifts under restrictions that are so tight that it would almost be as if they were seized.

“The difference is you have a guy with a private hat on handcuffed to his chair instead of a guy with a government hat on handcuffed to his chair,” Irving said.

James Bates reported from Los Angeles. Robert A. Rosenblatt reported from Washington.