WASHINGTON - A federal appeals court here has partially overturned a $909 million judgment against the government in a long-running battle over regulatory goodwill, returning the case to federal claims court for a recalculation of damages.

Many observers view the lawsuit, Glendale Federal Bank v. United States, as a test case for more than 100 similar actions pending in a lower courts.

The unanimous decision last week by a three-judge panel extended a 12-year dispute over regulatory goodwill, an accounting creation used by supervisors in the 1980s to persuade healthy institutions to buy moribund thrifts in the first stage of the savings and loan crisis.

One such buyer was California-based Glendale, which agreed to acquire a failing S&L in Broward County, Fla., in 1981. At the time, the Florida S&L had liabilities that totaled $734 million more than the market value of its assets.

To encourage Glendale to go forward with the deal, regulators allowed the thrift to carry the $734 million on its books as a form of goodwill that would count against its regulatory capital requirement. The bank was to amortize the goodwill over 40 years.

At the time, the government made similar deals with more than 100 other institutions.

Eight years after the Glendale deal, Congress passed FIRREA, the Financial Institutions, Reform, Recovery, and Enforcement Act, one element of which repudiated the commitment to honor regulatory goodwill and drastically truncated the amortization schedule.

To meet the new requirement, Glendale was forced to sell numerous subsidiaries and to leave certain lines of business. Nevertheless, it still failed its regulatory capital test in 1992. That year, it sued the government for breach of contract. (In 1998, Glendale merged with San Francisco-based California Federal Bank, a subsidiary of Golden State Bancorp.)

In April 1999, Judge Loren A. Smith of the United States Court of Federal Claims ruled in favor of Glendale, awarding it several types of damages. The bulk of the $909 million judgment came from $528 million awarded as restitution - equal to unamortized goodwill plus other charges. The judge also awarded $380.8 million of "reliance" compensation for losses incurred by the thrift after enactment of FIRREA because it had relied on the government's honoring its pledge.

The appeals court ruled Friday that Judge Smith had used an incorrect formula to calculate damages. It said he should not have awarded restitution for the lost goodwill but should have allowed broader reliance damages. The appellate court instructed Judge Smith to recalculate the restitution.

The ruling, though it may reduce the award in the Glendale case, may be a net win for Golden State Bancorp, the thrift's parent. A similar case, in which Golden State's subsidiary California Federal sued the government, ended in an award of $23 million, much less than the thrift had expected. The ruling was based, in part, on the judge's finding that reliance damages were not applicable. The circuit court opinion could help Golden State in its appeal of the California Federal ruling.

When the award is finalized, the thrift will retain 15% of the damages, and investors who bought tracking warrants will get the remainder.

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