U.S. to Pay S&L; $909 Million in Contract Breach

A federal judge on Friday ordered the government to pay a hefty $909 million in damages to Glendale Federal Bank, the first of what is expected to be a series of awards stemming from the S&L; crisis that could cost taxpayers as much as $50 billion.

The ruling is the first damage award among more than 120 cases filed by savings and loan associations that allege they were financially harmed when the government changed accounting rules and other regulations during the crisis in the 1980s.

Glendale Federal and other thrifts were given favorable accounting rulings in return for acquiring ailing thrifts.

The decision could potentially set a precedent for massive payouts by the government, writing a final chapter in the saga of S&L; failures that have already cost taxpayers an estimated $250 billion.

If the courts approve the damage claims of other S&Ls; with the same financial approach used in the Glendale Federal case, the government might have to pay as much as $50 billion, according to some lawyers involved in the issue.

And the decision could encourage companies in other industries to take legal action too, claiming that changes in other government regulations crippled their search for business profits.

Chief Judge Loren A. Smith of the U.S. Court of Federal Claims gave Glendale Federal about half of the $2 billion in damages it had been seeking for breach of contract. Smith said that, while he could not award Glendale Federal interest payments on the financial damages it suffered, he understood the company’s “frustration” in its protracted battle with the government.

Since filing the suit, Glendale Federal has been acquired by California Federal Bank, which is owned by San Francisco-based Golden State Bancorp. The award, if upheld, would go to Golden State.

The decision issued Friday was the first judicial calculation of damages suffered by healthy S&Ls; that were persuaded by federal regulators to take over ailing institutions.

The Justice Department hinted that it might appeal Friday’s ruling.

“We are currently reviewing the decision,” the department said in a statement. “We remain confident in our position and look forward to a fair and expeditious final resolution of all the . . . cases. The Glendale decision is one part of this process.”

Victory Seen for Glendale Federal

Noting that the combined legal fees in the Glendale case exceeded $100 million, the judge offered “profound hope” that those involved in the 120-plus cases still pending will “take heed” and reach settlements. “The court strongly believes that settlements, where fair compromise occurs, are in everyone’s interest,” Smith said in his ruling.

The size of the award, just shy of $1 billion, represents a victory for Glendale Federal in its claim that it was severely damaged by the actions of federal regulators.

“It’s clear that the ruling underscores the fact that the federal government must respect the sanctity of a contract,” said Stephen J. Trafton, executive vice president of Golden State and former chief executive of Glendale Federal. “People must honor their agreements. The government, far from being an exception to this rule, should champion it, since our country’s prosperity is founded on the idea of enforceable contracts. That’s what this case is all about.”

Glendale took over First Federal Savings & Loan Assn. of Broward County, a Florida thrift, in 1981, at the urging of the federal government. First Federal’s liabilities exceeded its assets by $734 million, but the federal regulators allowed Glendale to count this deficit as “goodwill,” an asset on its books.

Congress Changes Regulatory Rules

The federal insurance system protects individual deposits up to $100,000, and federal regulators wanted to avoid having to close thrifts and pay off depositors, so they approached healthy S&Ls; like Glendale to persuade them to acquire the weak ones.

But in 1989, Congress passed a financial regulations act that cut back severely on the regulatory acceptance of goodwill. Suddenly, Glendale and other S&Ls;, which had been considered healthy under the old rules, now were in violation of regulatory standards. To meet the new rules, Glendale Federal had to shrink, raising capital to satisfy the government by selling valuable operations in Florida and Washington, and restricting its lending.

Glendale Federal sued the government in 1990, claiming that its agreement to take over the failing Florida institution was a contract, and that the government had violated the contract by changing the regulations on goodwill and other issues.

The case was fought to the U.S. Supreme Court, which ruled that there had been an enforceable contract. The Supreme Court decision raised the possibility of huge potential damage payments by the federal government. It was the first time the court had ruled that government regulatory action could constitute a contract, just as the government signs a contract when it buys missiles or pays for highway construction.

Companies in the energy business and in telecommunications have been watching the Glendale case closely, and they too may pursue suits claiming damages because of government regulatory actions.

Smith said the task of calculating damages owed Glendale was difficult because it involved an 18-year-old contract. But the government should not be absolved from paying damages because the time that has passed and the complexity of the case make it “more difficult to calculate or conceptualize damages,” he said in his 24-page ruling. The government has had the benefit of using money for 10 years that properly would have belonged to Glendale, he said.