Ruling Favors Thrifts in Lawsuit Against U.S.

U.S. thrifts claimed a victory Monday in a multibillion-dollar legal battle against the federal government for breaking promises it made in the 1980s to enlist their help in the savings-and-loans crisis.

The U.S. Court of Federal Claims issued a summary judgment against the federal government on key liability issues in four pending lawsuits filed by thrifts, including Los Angeles-based California Federal Bank, which is owned by MacAndrews & Forbes Holdings.

The thrifts suing the government contend they were hurt when Congress changed S&L; accounting rules to close a loophole that allowed thrifts to avoid writing off losses they suffered on bad loans. Regulators had used the loophole to hold down the cost of suing failed thrifts.

“If the arguments put forth here are the strongest the U.S. can muster against liability then the government has a moral obligation to seek a fair and equitable settlement from the parties whose contracts were breached,” said Judge Loren Smith in the ruling from Washington.

About 120 suits have been filed against the federal government by thrifts charging the government changed accounting rules offered as so-called goodwill incentives.

Hoping to take advantage of the goodwill incentives, many thrifts in the 1980s acquired other troubled thrifts with steep losses. The accounting changes left many of the acquiring thrifts saddled with large losses.

The legal cases arise from a 1989 law passed by Congress to deal with the S&L; crisis. It was that law that led to the failure of hundreds of thrifts and criminal prosecutions of scores of officers and directors for insider dealings and approval of shaky loans.

The law changed the way S&Ls; can count their assets. Thrifts that had taken over less healthy institutions with the encouragement of government regulators contended that the law violated their contracts with the government by barring them from carrying certain assets on their books.

“The favorable decision on liability is a milestone in our case,” said Christie Flanagan, executive vice president and general counsel for CalFed Bank.

Other plaintiffs involved in Monday’s ruling were C. Robert Suess, the owner of Benjamin Franklin Savings & Loan, Landmark Land Co. and LaSalle Talman Bank.

Glendale-based Golden State Bancorp, parent of Glendale Federal Bank, which has proposed a $1.5-billion settlement in its lawsuit--the largest and most advanced case in the thrift industry--said the court’s action sent a strong signal to the government the goodwill cases should be settled.

That case, in which the government’s liability had already been established, is currently in the damages phase.

In November, the Justice Department has said it had been in settlement negotiations on that case.

On Monday, the Justice Department said it was reviewing the latest development in the thrift goodwill cases. “We’re reviewing the decision,” said Justice Department spokesman Bill Brooks. “It’s going to take some time to review thoroughly.”

Smith on Monday also established an expedited procedure, whereby the ruling could be applied to the other supervisory goodwill cases, Steven Rosenthal, attorney for CalFed, said.

In other words, thrifts will be able to enter the damages phase more quickly than Glendale Federal, Rosenthal said.

A decision in the Glendale case is expected in the second half of 1998.

Glendale Federal first sued in 1990. In 1992, the Court of Federal Claims ruled the government had breached its contract and was liable to Glendale Federal for damages. The government appealed the decision to the U.S. Court of Appeals for the Federal Circuit, which affirmed the original decision in 1995.

The U.S. Supreme Court upheld the original decision in a 7-2 vote the following year. The current case is to determine damages.