The chief judge of U.S. claims court strongly rebuked the federal government Monday for its handling of thrift regulatory goodwill cases, but he put off a final decision in all but four cases.
Judge Loren A. Smith said he intended to make a ruling that the government broke contracts with 120 thrifts to let them carry regulatory goodwill as capital. But he gave the Justice Department a last chance to convince him why he should not side with the aggrieved institutions.
The judge also urged both sides to settle their dispute, accusing the government of dragging it out far too long. He rejected the government's bid to have all 120 cases litigated separately.
Most of the affected institutions failed after Congress abolished regulatory goodwill, which propped up their balance sheets, in 1989. The failures led to breach-of-contract accusations that are taking years to resolve and could cost the government billions of dollars.
"The United States has not acted in a manner worthy of the great nation it is," Judge Smith said in a written opinion. "Because the dollars at stake appear to be so large, the government has raised legal and factual arguments that have little or no basis in law, fact, or logic."
Judge Smith said the government is liable for voiding contracts with California Federal Bank, LaSalle Talman Bank, and the defunct Landmark Land Co. and Benjamin Franklin Savings and Loan.
He now must decide how much the government must pay in damages, the same issue that has been litigated for a year in Glendale Federal Bank's goodwill case. Trials in these four new cases are not expected for at least a year. Damages in all 120 cases are expected to exceed $20 billion.
Judge Smith indicated he had little patience with the whole process, accusing the government of doing everything possible to delay the cases. "The government has a moral obligation to seek fair and equitable settlement from the parties whose contracts were breached," the judge wrote.
"If this cannot be achieved, then the court is here to resolve these cases. However, the court is a tool of last resort. Where the government has violated rights, it should first attempt to do justice without judicial prompting."
This is Judge Smith's second attempt to convince the government to settle. In July he urged the Justice Department to settle the Glendale case, saying he believed the California thrift would win.
A Justice Department spokesman declined to comment, other than to say lawyers are reviewing the decision to decide what to do next.
Thrift executives and lawyers applauded the ruling.
"The favorable decision on liability is a milestone in our case," said Christie Flanagan, general counsel at CalFed. "We await a trial to determine our damages."
CalFed has issued special securities that entitle holders to a portion of any reward. In late afternoon trading, the price of CALGZ rose 25 cents to $23.625; CALGL was up 50 cents to $28.375.
"The decision means the judge saw the government's arguments and tactics for what they are," said Charles J. Cooper, a partner at the Washington law firm of Cooper & Carvin, who represents several plaintiffs in the goodwill cases. "They are either a series of previously rejected or wholly implausible arguments designed simply to delay the ultimate resolution of this case."
"This decision is about as clear as one could expect," said Ronald Stevens, a partner in the Washington office of the Kirkpatrick & Lockhart law firm. "Sooner or later someone in the government needs to realize that they have lost the case on liability."
Stephen J. Trafton, chairman and chief executive officer of Glendale Federal, said he hopes the judge's harsh words will convince President Clinton and congressional leaders to force Justice to settle.
"Until now, the Justice Department has acted in a vacuum," Mr. Trafton said. "This decision should be a wake-up call to the administration and Congress that there is a significant potential liability extending to as much as $20 billion that needs to be considered on an ongoing budget basis."
Glendale has offered to settle its case for $1.5 billion, which it would use to help fund a community reinvestment program. The deal is valid until Jan. 30.
Judge Smith said the government has 60 days to show cause why he should not rule for the thrifts in any case where a motion for summary judgment is pending. This encompasses the bulk of the 120 cases, although lawyers said they have not calculated an exact figure. For cases without a pending motion, the government must respond with new arguments within 90 days of the filing of the summary judgment request.
The issue dates back to the 1980s when a nearly bankrupt Federal Savings and Loan Insurance Corp. enticed healthy thrifts to acquire their ailing peers by promising to let them count as capital for up to 40 years the differences between the sick thrifts' assets and liabilities. Congress, worried about accounting gimmicks, eliminated regulatory goodwill in the 1989 thrift bailout law.
The Supreme Court last year ruled that the government broke its word and ordered the federal claims court to determine how much damages Glendale and two failed thrifts deserved. But Justice has been arguing that the Glendale decision does not apply to the other 120 cases.
