An award of $5 million in a supervisory goodwill case last week appeared to be a setback for scores of thrifts waging similar legal battles, but the opinion behind it contained some encouraging words for the industry.
The U.S. Court of Federal Claims ruled Friday that Lasalle Talman of Chicago, a predecessor of ABN Amro North America Inc., failed to prove that it suffered the $1.5 billion of damages it sought in connection with four acquisitions it made in a government program. It was the third -- and slimmest -- grant of damages in a goodwill case spawned by the 1989 savings and loan bailout.
In his ruling, however, claims court Judge Eric G. Bruggink rejected many of the government's arguments, in particular the contention that supervisory goodwill was an artificial form of capital and therefore had no real value. He wrote: "It was recognized as regulatory capital by the regulators, and as such, had substantial value to plaintiff."
Observers said they were encouraged by the finding that goodwill has value. Lasalle Talman "got a small number, but a home-run legal decision," said Richard Macary, managing director of Collectibles LLP, a New York firm that advises investors with a stake in goodwill cases.
At the heart of the goodwill cases is this question: Must the government compensate thrifts that it persuaded to take over failing counterparts, only to renege on the special accounting treatment that made such acquisitions palatable?
To help clean up failing S&Ls, the government allowed healthy thrifts that bought sick ones to write off negative net worth for up to 40 years. But in 1989, a provision of the thrift reform law discontinued this so-called regulatory goodwill, forcing the buyers to quickly recognize the losses. The Supreme Court ruled in 1996 that the government breached contracts with the thrifts. More than 100 are seeking claims.
In its ruling Friday, the claims court awarded Lasalle Talman incidental damages for costs such as investment banking fees incurred in replacing goodwill with other capital.
But the judge found that the thrift's loss of supervisory goodwill was offset by benefits from the government, pointing to cash payments and debt cancellations made by the Federal Savings and Loan Insurance Corp. The loss was also mitigated by a $300 million infusion of capital and subsequent investments in 1992 by the thrift's acquirer, ABN Amro, according to the opinion.
His ruling follows a $909 million award granted to Glendale Federal Bank in April by the claims court's Chief Judge Loren A. Smith and a $23 million award to California Federal Bank a week later by claims court Judge Robert H. Hodges Jr. While Chief Judge Smith found restitution is due, Judge Hodges found only the transactional cost of raising new capital is owed.
(Cal Fed, which sought $1.5 billion, and Glendale, which sought $2 billion, merged last year. Both cases are on appeal before the U.S. Court of Appeals for the Federal Circuit.)
People with a stake in thrifts that have brought goodwill claims said the Bruggink opinion could serve as a guidepost for future damages opinions. "There are two judges now that put out well-thought-out, reasoned opinions that goodwill has value," said Gary E. Hindes, general partner of the Fallen Angels Fund LP in Centerville, Del. Two of the three judges have made clear that you are entitled to damages if you can prove it, he said.
Judge Bruggink also dashed the government's plan to calculate damages by comparing the thrift's stock price a week before and a week after the passage of the thrift reform law. "Defendant's argument is appealing in its simplicity," Judge Bruggink wrote. "Nevertheless ... it is flawed conceptually, and in its particular application here."