A judge involved in the goodwill litigation could redefine the Federal Deposit Insurance Corp.'s power over failed institutions.
At issue is whether the FDIC or investors in failed financial institutions have the right to sue the government for breaking its contracts.
These particular cases center on Congress' decision to force thrifts to write off regulatory goodwill in five years instead of over as many as 40 years as promised. But a decision could affect future claims arising from the next banking crisis.
Judge James T. Turner of the U.S. Court of Federal Claims must decide whether the agency or investors own the claims made by the failed institutions.
This issue is important because the entity that owns a claim gets to control the case, including the decision on whether to settle or fight in court.
John Thomas, the FDIC associate general counsel, told Judge Turner at a hearing Tuesday that the FDIC should take over 42 goodwill cases from investors because it is the receiver for the failed institutions. That means it is responsible for getting as much cash as possible for the creditors, which include the deposit insurance funds.
The FDIC also attacked the investors' legal standing, saying they may not sue because they did not suffer any damages directly. Rather, the thrift suffered when it failed after the government eliminated goodwill.
The investors were only injured indirectly, losing money when a thrift's stock price plummeted.
"To have a direct claim, we believe two elements are required," Mr. Thomas said. "You must have a contract, and you must be a party that has a damage separate from the thrift itself. We don't believe the shareholders can meet those standards."
The FDIC got some help from the Justice Department, which told Judge Turner that Congress clearly intended the FDIC to litigate all claims on behalf of failed institutions.
"There cannot be a debate," said Jeanne E. Davidson, the assistant director of commercial litigation at Justice. "By statute, the FDIC succeeds to all duties and rights of failed thrifts."
Lawyers for the investors, however, said the government completely misunderstands the case.
"The question isn't who owns the goodwill claim," said Daniel Goldstein, a partner at the Annapolis, Md., law firm of Brown, Goldstein & Levy. "But who was a party to the contract."
The investors and the holding company signed the contracts, he said. The thrifts, which subsequently failed, were not directly involved in the deal.
"The thrifts were just the beneficiaries" of the deal, he said.
Because the thrifts were not a party to the deal, the FDIC lacks jurisdiction over the case, Mr. Goldstein said.
He compared the case to a consumer asking a mechanic to fix his car. In this case, the government asked investors to fix an ailing thrift. The investors agreed, making them the party to the contract.
The thrift, however, played no role in negotiating the contract, he said. Rather it was the object being negotiated.
"The car is emphatically not a party to the litigation," he said. "Let's make this as basic as possible."
Judge Turner is expected to rule shortly.