Glenfed Wins Suit Against U.S. : S&Ls;: The thrift is entitled to damages because a government rule change unfairly restricted its business, court rules.

A federal judge ruled Friday that the government breached a contract with Glendale Federal Bank by changing thrift accounting rules, opening the way for the Southern California institution to seek millions of dollars in damages.

The judge said Glendale Federal is entitled to damages because the 1989 change in thrift regulations by Congress unfairly restricted its business opportunities and shook the confidence of its investors.

Stephen J. Trafton, chief executive of Glenfed Inc., the thrift’s parent company, reacted cautiously to the decision. He called it a vindication for the troubled thrift and vowed to aggressively seek compensation, which could help bolster its capital base.

The ruling also could affect about 40 similar suits pending across the country and add hundreds of millions of dollars to the cost of bailing out the nation’s S&L; industry.

Among the institutions that have filed similar suits are California Federal Bank and Coast Federal Bank, two of Southern California’s biggest thrifts.

The issue involves the 1989 law passed by Congress to bail out the S&L; industry and tighten regulations. One of its effects was to eliminate accounting procedures that made it financially attractive in the 1980s for healthy institutions to acquire ailing thrifts.

Glendale Federal filed a lawsuit here claiming that the government breached its contract by changing the law regarding the accounting rule, known as supervisory goodwill.

The thrift had been permitted to count $734 million worth of goodwill as an intangible asset after taking over an insolvent Florida savings and loan in 1981. The new law wiped out that asset, forcing the thrift to search for new capital to fill the hole at a time when raising money is difficult for the industry.

Glendale Federal, with $19 billion in assets, has been slashing costs and trying to raise new capital to comply with a June 30, 1993, deadline imposed by regulators last month.

The Justice Department had argued that the government did not enter a contract with Glendale Federal, but only approved the merger with the Florida thrift. As a result, said the department’s lawyers, the change in the law did not breach the contract.

But U.S. Claims Court Chief Judge Loren A. Smith ruled that the arrangement constituted a contract and the S&L; should be compensated for losses suffered as a result of the rule change. He said Glendale Federal had entered into the 1981 merger with the understanding it could count the goodwill as an asset for 40 years.

“The exclusion of supervisory goodwill has required Glendale to implement costly measures to compensate for the loss of goodwill from its regulatory capital amounts; constrained capital resources and thereby restricted business opportunities, and adversely affected the confidence of Glendale’s investors,” wrote Smith.

He found a similar breach by the government in the case of Statesman Savings Holdings Corp. involving its acquisition of thrifts in Florida and Iowa.

Smith’s ruling was similar to one he made in April involving another thrift and set the stage for a likely government appeal. A spokesman for the Justice Department had no immediate comment.

The amount of damages or restitution for Glendale Federal will be determined in a trial before Judge Smith.

Although there are no indications yet how much Glendale Federal may recover, the decision was good news for the ailing institution. The thrift is under a regulatory order to bolster its capital over the next year. If it fails to do so, the thrift faces possible seizure.

Despite the decision, Trafton cautioned that the institution “faces extraordinary regulatory challenges, in addition to the difficulties posed by economic and real estate market weaknesses.”

Staff writer James Bates in Los Angeles contributed to this report.