Ruling Expected in Key Glendale Federal Suit : Thrifts: It is suing the government over a change in the law that it says hurt it. Its survival may hinge on the outcome.

A federal judge is expected to rule as soon as today on demands by one of California’s largest savings and loans for hundreds of millions of dollars in restitution from the U.S. government.

The outcome of Glendale Federal Bank’s lawsuit promises ramifications not only for the institution, which has assets of $19 billion, but also for other big Southern California S&Ls; and the ultimate cost of the industry bailout nationwide.

“Basically, for this company it’s a matter of life and death,” said Stephen J. Trafton, Glendale Federal’s chief executive.

The suit stems from a 1989 law that Congress passed to bail out the S&L; industry. One of its effects was to eliminate accounting procedures that made it financially attractive in the 1980s for healthy thrifts to acquire ailing ones.

About 40 similar suits are pending across the country, raising the possibility that the government could face a restitution bill in the billions of dollars on top of the already massive costs of bailing out the nation’s thrifts.

The Southern California thrifts Coast Federal Bank and California Federal Bank are among those that have filed suit.

“It’s a hell of a mess, and there’s billions of dollars at stake,” said Bert Ely, a financial industry consultant in Alexandria, Va. “There are lots of problems, both legally and from a fairness standpoint.”

Thrift executives and other experts also say that, if the matters are resolved in favor of the institutions, new money could be freed up for lending to cash-starved real estate markets.

In the Glendale Federal case, the institution acquired a sick Florida thrift, First Federal Savings & Loan Assn., in 1981. At the time, the government estimated that closing First Federal and paying off its insured depositors would cost $734 million.

The government did not have the cash for such bailouts then, so regulators allowed an accounting device known as “goodwill” to persuade healthy institutions to take over sick ones with as little government assistance as possible.

Goodwill allowed acquirers to count the negative net worth of the insolvent institutions as a non-earning asset for 40 years. In the First Federal deal, Glendale Federal received $734 million in goodwill and no government cash.

Critics of goodwill--essentially an intangible asset--argued that the government employed accounting gimmicks to artificially inflate the net worth of institutions using non-existent capital.

So the 1989 law retroactively wiped out use of goodwill--about $25 billion to $30 billion had already been approved--leaving Glendale Federal and dozens of other thrifts with massive holes in their balance sheets at a time when raising capital was difficult.

Glendale Federal filed suit here in U.S. Claims Court, a special court in which private parties pursue financial claims against the federal government. The suit contends that the government violated its contract by changing the rules for goodwill. It seeks unspecified damages.

“The government is reneging on its deal,” said Joe Hollingsworth, a Washington attorney whose firm represents Glendale Federal. “This has repercussions for anyone who does business with the government.”

The Justice Department contends that regulators approved the thrift acquisitions but that the approval did not make the government a party to the contracts. So, the government contends, changing the law did not violate the Glendale Federal contract.

The department also argues that the federal government is exempt from such suits and has the right to nullify its contracts in the public’s interest.

The government suffered a setback in April. In ruling on similar claims by another thrift, Claims Court Chief Judge Loren Smith acknowledged that the government can cancel contracts. But Smith said that S&Ls; should be compensated for losses they suffered when the accounting rules changed under the 1989 law.

Smith is expected to rule in the Glendale Federal case as early as today. The thrift’s attorneys expect a ruling similar to the one he made in April.

If the government appeals, the process could drag out past a June 30, 1993, deadline imposed last month on Glendale Federal to improve its financial standing or face regulatory sanctions.

Like many thrifts, Glendale Federal has been fighting to survive in an atmosphere of real estate loan problems and tighter regulation.

Trafton said Glendale Federal will be out of compliance with regulatory standards by the deadline and could face a government takeover unless it wins its court case or the goodwill decision is reversed before then.

Two bills pending in Congress are aimed at relaxing the restrictions on goodwill, but congressional insiders and other observers say there is little chance of passage.

Along with threatening Glendale Federal, Trafton said, the government’s refusal to honor its agreements with thrifts has contributed to reduced real estate lending in Southern California, where thrifts are major providers of home mortgages.

“This has had a catastrophic impact on our ability to provide credit to the real estate industry because of the financial uncertainty it has created,” Trafton said.

Consultant Ely predicted a logjam of similar suits if Glendale Federal wins its case, although he said that many of the institutions that were granted goodwill have failed in recent years.