Thrifts hurt by the loss of regulatory goodwill can use a lucrative damage theory in stating their claims against the government, a federal judge ruled late Wednesday.
Chief Judge Loren A. Smith of the U.S. Court of Federal Claims ruled that thrifts may assert the so-called "lost-profits" theory of damages to determine how much the government should pay for reneging on the favorable goodwill accounting treatment.
Judge Smith rejected the Justice Department's contention that a federal appeals court had barred plaintiffs from using the theory in cases against the government. Rather, he said, the decision allows plaintiffs to recover lost-profits in breach-of-contract cases.
Under lost-profits theory, the government would have to pay thrifts for all the profits they would have earned if it had left regulatory goodwill intact. Glendale Federal Bank alone estimates its lost profits at $1.4 billion.
"This was a milestone," said Charles J. Cooper, a partner at the Washington law firm of Cooper & Carvin. "We are just delighted with the results. Now we will continue with the business of readying the cases for trial."
Lawyers following the cases said the lost-profits theory normally generates the largest amount of damages. But they noted that Judge Smith also promised the more than 100 other plaintiffs that they would be free to present competing theories during their trials.
"Everyone will have their own, individual opportunity to argue their own theory of damages," said Rosemary Stewart, who represents the majority shareholder of the now-defunct Southwest Savings and Loan in Dallas.
Also at Wednesday's hearing, the judge said he will start in September to have two trials a month for as long as it takes to dispose of the more than 100 remaining cases. The judge also urged the government to settle, saying he was available to mediate negotiations among the parties.
The goodwill cases date back to the early 1980s, when the imminent failure of hundreds of thrifts threatened to bankrupt the Federal Savings and Loan Insurance Corp. To stave off default, the agency enticed healthy thrifts to take over their ailing peers by letting them depreciate over 40 years the difference between the sick institutions' assets and liabilities.
But lawmakers changed their minds in 1989, requiring the thrifts to writeoff the regulatory goodwill over five years. This caused scores of failures, as more than 100 thrifts suddenly found themselves woefully undercapitalized. The few thrifts that survived, and investors in those that failed, filed more than 100 breach-of-contract suits seeking more than $20 billion in damages. The Supreme Court agreed in July that the government was liable, and it ordered the claims court to determine how much each institution is owed.
The first of these cases, involving Glendale Federal Bank, is set for trial on Feb. 24. The second case, involving Statesman Group, will start March 31.