Settlement of regulatory goodwill litigation appears less likely now than ever before in the 10-year-old legal drama. Two judges of the U.S. Court of Federal Claims have reached opposite conclusions on whether the government must pay onetime acquirers of failing thrifts billions of dollars for eliminating a favorable accounting treatment granted in the 1980s.
Judge Robert H. Hodges Jr. ruled April 16 that California Federal Bank is entitled to $23 million in its breach of contract dispute. The decision shocked many sources because it was such a small portion of the $1.5 billion the San Francisco thrift had demanded and came just a week after Chief Judge Loren A. Smith had ordered the government to pay $909 million in a similar case involving the former Glendale Federal Bank.
California Federal has vowed to appeal, and the government is widely expected to appeal the Glendale judgment. (Glendale was bought last year by Golden State Bancorp, California Federal's parent. Both thrifts now operate under the Cal Fed name.)
"Everyone is waiting for an appeals court ruling now," said Richard Macary, managing director of Collectibles LLP, an investment advisory firm. "The question is whether Judge Smith or Judge Hodges is right."
"Settlements happen when you have certainty about the outcome," one lawyer said. "Now the government is going to say Judge Hodges is right, and other thrifts are going to say Judge Smith is right."
The likely outcome is more delay. The appeals will take a minimum of six months but could drag on for two years or more.
"This makes everyone realize that Judge Hodges' decision, rather than bring closure to this litigation, has caused a delay in this litigation," Mr. Macary said.
Expectations were 180 degrees different on April 9 when Judge Smith said Glendale was entitled to be compensated for the amount the Federal Savings and Loan Insurance Corp. would have spent if it had been forced to rescue First Federal Savings and Loan of Broward County, Fla. He also granted reliance damages-reimbursement for increased costs the thrift incurred because of the breached contract, for example, higher deposit insurance premiums.
Many lawyers expected Judge Hodges to rely heavily on Judge Smith's decision. But issuing his opinion just a week later, Judge Hodges essentially rejected all of California Federal's damage claims, arguing that the thrift was healthy before the breached contract and is healthy today.
The scale of the government's victory in the California Federal case cannot be overstated, experts said.
"The Department of Justice did not even expect to get a win this big," Mr. Macary said. "They settled several cases with a quarter to half the goodwill as California Federal for $50 million, which is double what Cal Fed got."
More than 100 regulatory goodwill cases are pending. They collectively seek more than $20 billion in damages.
The controversy dates from the mid-1980s, when a nearly bankrupt FSLIC persuaded healthy thrifts to acquire their ailing peers, promising to let the buyers count the difference between the sick institution's assets and liabilities as capital for up to 40 years.
Congress, accusing regulators of using accounting gimmicks to prop up sick thrifts, eliminated regulatory goodwill in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The sudden loss of goodwill caused scores of thrifts to become woefully undercapitalized, and most failed.
The thrifts sued, and the Supreme Court ruled in 1996 that the government was liable for breaking its word. It ordered the claims court to determine how much, if anything, the thrifts deserved in compensation.